8 Things You Need To Know About Rights Issue Of Shares

In the financial world, among numerous strategies for flourishing a business, raising capital is an imperative one. One such popular method is issuing rights to the existing shareholders, popularly known as “Rights Issue of Shares”. This method is not just beneficial for the companies to generate capital but is also advantageous for the existing shareholders. To help you understand this better, here are eight things you need to know about the Right Issues of shares.

The crux of the right issues comes with the prerogative of being an existing shareholder. When a company decides to raise its capital, it might issue additional shares to its existing shareholders. This mechanism benefits the shareholders by giving them a pre-emptive right to buy the company’s additional shares before they are offered to the public or any other investor. The intent is to ensure that the existing shareholders maintain their proportional ownership in the company even after the rights issue. It’s worth mentioning that, rights issues is one of the core parts of the secondary market, also encapsulating different types of derivatives.

A derivative is a financial security with a value reliant upon an underlying asset or group of assets. Derivatives can be used for different purposes including to hedge risks, create leverage, and ensure access to otherwise hard-to-trade assets or markets. However, as with all forms of investment, types of derivatives also come with their own set of risks and rewards. Having a clear understanding of how they function can aid an investor in his investing journey. It is important to remember that trading in derivatives could result in significant losses and the investor must be willing and able to bear these losses in the context of its financial situation and investment objectives.

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Investors must always be aware of several factors while deciding to subscribe to a rights issue. One primary factor being the price of the issue. Usually, a rights issue is offered at a discount to the current market price. For instance, if the current market price is INR 200 per share, the rights issue might offer the share at INR 180. Hence, this becomes a brownie point for the shareholders as they get to buy the shares at a discounted price.

The second crucial aspect to note is the Rights Ratio. This indicates the number of shares an existing shareholder can buy. For Example, a Rights Ratio of 2:3 means that for every three shares held by an investor, he/she can buy two additional shares.

Thirdly, investors need to consider the fund requirement of the company. A rights issue might indicate that the company requires funds for business expansion or to clear debts. Therefore, investors should make an informed decision after assessing the reason for the rights issue.

Another critical point is the tenure of the rights issue, known as the Issue Opening and Closing Date. The investor must act within this period as post the closing date; the rights issue cannot be acquired.

Furthermore, if an investor decides not to subscribe to the rights issue, they can sell their rights on the stock exchange. These are known as renounceable rights.

Additionally, there’s a scenario called Oversubscription, which means if there are any unsubscribed shares after the rights issue, existing shareholders can apply for additional shares.

Finally, remember that the rights issue can dilute earnings per share since it increases the number of shares. Therefore, investors must calculate the earnings per share post the rights issue to make an informed decision.

Investing in rights issues can undoubtedly be beneficial. However, it’s advisable to analyse the company’s market position, purpose for the rights issue, and the impact on your investment portfolio. Before making an investment, it is recommended to consult with a financial advisor.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing. This article is purely informative and not a recommendation or solicitation of any kind. It is extremely important to understand all the aspects and terms while investing in the Indian Stock Market and right issues are no different. The investor is advised to consider all the pros and cons, do his due diligence or consult an investment advisor before investing.

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