What is the difference between right issue and preferential allotment?

In the corporate landscape, companies often resort to various methods to raise capital for expansion, debt reduction, or other financial needs. Two common methods employed for this purpose are Rights Issue and Preferential Allotment. In this article, we will explore the key differences between these two mechanisms of capital infusion.

Understanding Rights Issues for Shareholders:

A Rights Issue is a method through which existing shareholders of a company are given the opportunity to purchase additional shares at a discounted price.

Advantages of Rights Issue

Typically, companies opt for a Rights Issue to raise capital from their existing shareholder base without diluting ownership.

Rights Issue Allocation:

The new shares in a Rights Issue are offered to existing shareholders in proportion to their current shareholding. Each shareholder has the right to subscribe to a specific number of additional shares.

5. Renounceability:

Rights Issue shares are often renounceable, meaning shareholders can choose to transfer their rights to someone else, who can then subscribe to the new shares.

What is meant by preferential allotment of shares

Preferential Allotment involves the issuance of new shares by a company to a select group of investors, which may include existing shareholders, promoters, or strategic investors.

What are the advantages of allotment of shares?

Companies may resort to Preferential Allotment to bring in strategic investors, infuse fresh capital quickly, or meet specific regulatory requirements.

Preferential Allocation of Shares:

The allocation of shares in Preferential Allotment is not necessarily proportional to existing shareholding. It is based on negotiations between the company and the investors involved.

Renounceable Preferential Allotment

Preferential Allotment shares are usually non-renounceable, meaning the original allottee cannot transfer or sell their allotment rights to others.

Also Read: Purpose of Preferential Equity Allotment

Key Differences Between Preferential Allotment & Right Issue

Allocation Method:

Rights Issue allocates new shares based on existing shareholding proportions.

Preferential Allotment allows for more flexibility in the allocation process, not necessarily tied to existing shareholding.

Purpose and Timing:

Rights Issue is often used to raise funds from existing shareholders for specific purposes.

Preferential Allotment may be driven by strategic considerations, and the funds raised can serve various purposes.

Renounceability:

Rights Issue shares may or may not be renounceable, depending on the company's decision.

Preferential Allotment shares are typically non-renounceable.

Conclusion:

To sum up, Rights Issue and Preferential Allotment are both ways to raise money, but they target different people, use different ways to allocate shares, set prices differently, and are used for different reasons. Companies pick the method that best suits their needs and strategies. Investors and stakeholders need to carefully consider each method when looking at a company's financial choices.

Also Read: Risk Management Definition and Examples