Rights Issue of Shares

What is a rights issue?

You might have heard the term "rights issue" if you have ever owned stock in a company. It might sound complicated, but it's really not. We'll explain what it means, why companies do it, what it means for you as an investor, and how it compares to an IPO in plain language in this post.

So, what is a rights issue?

A rights issue is when a company wants to get more money and gives its current shareholders the first chance to buy more shares, usually at a lower price.

If you already own shares in a company, they are giving you a "special deal" to buy more before anyone else can. This is like a VIP sale just for current customers.

For instance:

If you own 4 shares, a 1-for-4 rights issue lets you buy 1 more share at a lower price.

Why do businesses do a rights issue?

Some of the most common reasons are:

To get money quickly for things like paying off debt, growing the business, or starting a new project.
It's less expensive and quicker than starting a public offering, like an IPO.
It gives loyal shareholders a reward by letting them buy more shares at a lower price.
What Do Shareholders Get Out of It?

As a current shareholder, you get a few perks:

Discounted price means that you pay less than what the market is currently charging.
Keep your ownership: You can keep your share of ownership in the company from getting smaller.
Option to sell the rights (in some cases): If you don't want to buy more shares, you can give someone else your rights and get some money instead.
What happens to the price of the share?

If the current share price is ₹100 and the company is offering rights shares at ₹80, That sounds like a good deal, but the value of the company will be spread out over more shares once the new shares are issued, so the price might go down a little.

This is a simple example:

You own two shares that are worth ₹100 each, for a total of ₹200.
You buy one rights share for ₹80. The total value is ₹280, which is now spread over three shares.
The new average price is now ₹93.33 for each share.
The new price is known as the TERP (Theoretical Ex-Rights Price).

What if you don't want to buy?

You don't have to buy the rights shares.

If you don't pay attention, your share of the company could go down (this is called dilution).
If you can give up your rights, you can sell them on the stock market.
If they can't be given up, you can't sell them, and you just miss the chance.
What makes a rights issue different from an IPO?

Here's a quick comparison:

Feature

Issue of Rights

IPO (Initial Public Offering)

Who can put money in?

Only current shareholders

Anyone (in public)

Price of shares

Usually on sale

Market-determined (may be higher)

Goal

Get more money from shareholders

Get money and put your company on the stock exchange.

Being the owner

Keeps it mostly with the people who own it now

Brings in new owners

Speed and cost

Less expensive and faster

A process that takes longer and costs more

Last Thoughts

A rights issue is just a way for a company to say, "We need more money, and we'd like our current shareholders to get first dibs."

If you believe in the company and its plans for the future, subscribing to the rights issue can be a good way to buy more shares at a lower price. But don't ignore it if you're not sure. See if you can sell the rights instead of letting them go to waste.