4 Dec, 2024
3 mins read
Imagine being offered a chance to strengthen your stake in a company you already trust at a price well below the market rate. That’s the opportunity a rights issue brings to the table, empowering shareholders while fueling a company’s growth journey. But what exactly is a rights issue, and how does it work? Let’s delve into its features, benefits, and practical examples to understand this mechanism better.
A rights issue of shares refers to a corporate action where a company offers its existing shareholders the right to purchase additional shares at a price lower than the prevailing market rate. This offer is typically made in proportion to their current holdings, allowing them to maintain their ownership percentage.
Proportional Allocation: Shareholders receive rights based on their current shareholding. For example, in a 1:5 rights issue, a shareholder owning 100 shares can purchase 20 additional shares.
Discounted Price: The subscription price is usually set below the market value, making it attractive for shareholders.
Voluntary Participation: Shareholders can choose to subscribe, sell their rights, or let them lapse.
Time-Bound: Rights are valid only for a specific period, after which they expire if unused.
Announcement: The company declares its intent, specifying the subscription price, ratio, and timeline.
Allocation of Rights: Shareholders receive rights entitlements in their demat accounts.
Subscription or Trading: Shareholders can exercise these rights, sell them on the stock exchange (if renounceable), or do nothing.
Fund Utilization: The company uses the raised funds for purposes such as debt reduction, expansion, or new investments.
Let’s consider an example to clarify the concept.
Scenario:
A company announces a 1:4 rights issue at ₹50 per share. The current market price is ₹80.
Existing Shares Held: 200 shares.
Eligible Rights: 200 × (1/4) = 50 shares.
Cost of Subscription: 50 shares × ₹50 = ₹2,500.
Portfolio Value Before Rights Issue: 200 × ₹80 = ₹16,000.
New Shares Acquired: 50.
Total Shares After Subscription: 250 shares.
Theoretical Ex-Rights Price (TERP): TERP=250(200×80)+(50×50)=₹74
This indicates a slight drop in the per-share price due to dilution but ensures long-term benefits if the company uses the funds effectively.
For Companies:
Efficient Fundraising: Provides a cost-effective method to raise capital without incurring significant underwriting or advertising costs.
Maintains Control: Prevents ownership dilution as shares are first offered to existing shareholders.
Strategic Funding: Enables companies to finance debt reduction, expansion, or strategic acquisitions.
For Shareholders:
Discounted Shares: Shareholders can purchase additional shares at a reduced price.
Ownership Stability: Maintains proportional ownership, protecting against dilution.
Market Flexibility: If shareholders choose not to subscribe, they can sell their rights, creating an opportunity for liquidity.
Calculating the impact of a rights issue involves determining the TERP and evaluating the revised portfolio value. Let’s use the previous example to illustrate:
Revised Portfolio Value:
(Existing shares × Market price) + (Rights shares × Subscription price)
= (200 × 80) + (50 × 50)
= ₹18,000
Shares After Subscription: 250 shares.
TERP: ₹18,000 / 250 = ₹74.
This approach helps shareholders decide whether to participate in the rights issue.
Check Eligibility: Ensure your name appears in the shareholder’s record on the record date.
Apply Online: Use your broker’s platform or ASBA through your bank.
Monitor Rights Entitlements: If you don’t wish to subscribe, sell your entitlements on the exchange (if renounceable).
A rights issue serves as a vital mechanism for companies to raise funds and for shareholders to reinforce their investment at favorable terms. By participating wisely, shareholders can capitalize on the opportunity while contributing to the company's growth.
To explore how FYERS simplifies the process of applying for corporate actions like rights issues, visit our platform today!
Yes, it can be advantageous as shares are offered at a discount. However, evaluate the company’s financial health and the purpose of the issue before investing.
The share price typically adjusts downward post-issue due to dilution. However, effective fund utilization can lead to long-term appreciation.
If the rights are renounceable, you can sell them on the stock exchange. Non-renounceable rights cannot be transferred or traded.
Not necessarily. While it may dilute share value in the short term, it offers shareholders the opportunity to invest further at a discount, potentially leading to long-term gains
Calculate your Net P&L after deducting all the charges like Tax, Brokerage, etc.
Find your required margin.
Calculate the average price you paid for a stock and determine your total cost.
Estimate your investment growth. Calculate potential returns on one-time investments.
Forecast your investment returns. Understand potential growth with regular contributions.
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