When a company asks its present owners to buy more shares at a lower price, this is called a rights issue. Shareholders can buy these new shares at a price lower than the market rate. Understanding what a rights issue is helps the company make more money without having to find new investors.
A. A brief explanation of a rights issue
People who own shares can trade rights on the market in the same way they would trade regular shares until the date when new shares can be bought. The rights given to a shareholder are valuable. So, they compensate for the future decrease in the value of present owners’ shares.
B. Importance of rights issue in the Indian context
Rights issues give current owners special attention. A business provides its owner’s shares in proportion to the number of shares they already own. All current owners are free to trade with other people in the market. The current owners can also turn down the RI deal.
II. How does a rights issue work?
As you already know about what a rights issue is, it’s now time to learn how it works. When a business gives its current owners rights, those rights let them buy more shares directly from the company at a price lower than the secondary market. How many more shares a person can buy depends on how many shares they already own.
A. Definition and purpose
When a company can’t borrow more money, rights issues are often the only way to pay off its debt. But not every business that has rights issues has money problems. Rights issues can be used by any business, even ones with clean balance sheets. They are a way for companies to get extra money to pay for things that will help them grow their business, like buying other companies or building new places to make or sell things.
B. A step-by-step process of a rights issue
The company’s owners are allowed to manage the company’s money. When they need short-term money, they usually get loans or short-term credit lines. Issuing new stock shares is the best option for long-term use or to meet the company’s long-term goals and vision. They can do this through the following steps:
- Call a meeting of the company’s board of directors.
- Send out an offer letter and wait for acceptance.
- Again, call a meeting of the board of directors.
- On PAS-3, file the form with the ROC.
- Issue share certificates.
C. Key players involved in a rights issue
People who already own shares are the only ones who can join in the rights issue. That way, they can choose to increase their interest in the business by buying more shares at a lower price.
III. Rights issue vs other financing options
Compared to other ways to get money, like debt financing or Initial Public Offerings (IPOs), rights issues are a cheaper option. In contrast to IPOs, rights issues don’t require screening fees or other costs that come with them. That makes them cheaper for the company.
A. Comparison with IPOs and FPOs
When a company goes public, its goal is to raise money from investors by selling shares to the public. After the IPO and reaching its goal of building its business, the company may need more money. This is when FPOs are given to the company. The main reason a company issues FPOs is to raise more money from investors. But FPOs can also be used to lower the number of shares a marketer owns.
B. Advantages and disadvantages of rights issues
The main benefit of the rights issue is that existing owners have the exclusive right to buy more shares at a set price. However, some things could go wrong—like diluted ownership for clients who don’t take part and market distrust, which could cause the value of the stock to drop.
IV. Regulatory framework in India
Shareholders can get the rights issue in the same amount that they own shares in the company. If the business wants to sell shares to people who aren’t already owners, it needs to pass a special vote under section 81(1)A.
A. SEBI guidelines on rights issues
You must have a good understanding of what a rights issue is by now. According to the Articles of Association, an ordinary resolution of the members must pass the rights issue at a general meeting. Shareholders can get the rights issue for the same amount that they own shares in the company.
B. Compliance and legal aspects for companies
Legal compliance means ensuring that all actions, practices, and processes are carried out in accordance with local, national, and foreign laws, as well as internal and industry-specific rules and regulations. An offer letter is sent to current shareholders of the company that tells them how many shares they can give up in exchange for cash and gives them the option to give up their shares. This right is also known as the pre-emptive right.
V. Case Studies
Some people who own shares in a company are thinking about issuing more shares because they see it as a way to make more money from the market. Shareholders need to carefully examine why the company is raising money and see if supporters or promoter groups are on board with the problem. Let’s use an example to help us understand this idea.
A. Real-world examples of companies in India that have utilized rights issues
Reliance Industries Ltd. has put forward the right issue at a rate of 1:15. This means that Reliance Industries Ltd. owners can buy one equity share for every fifteen equity shares they owned on the record date. The right price to sell is Rs 1,257. It’s almost 14% less than the price of the company stock on 30 April 2020, which was Rs 1,466.
B. Analysis of the outcomes and impact on the companies
At first, the share price might go down because of the dilution effect that occurs when new shares are sold at a lower price. If the money raised is used well and helps the company grow, it can lead to a positive impact on the share price in the long run.
VI. Investor perspective
Companies give out rights when they need money for different reasons. With this method and by having a good knowledge of what a rights issue is, the business can raise money without having to pay underwriting fees. By allowing current owners the right, not the duty, to buy shares at a lower price on or before a specific date, a rights issue gives them special treatment. People who already own shares can trade with other people who are interested in the market until new shares become available for purchase. Rights shares can be bought and sold in the same way that regular stock shares can.
A. How rights issues benefit existing shareholders
People who already own shares can get unique benefits from rights issues. People who own shares in a company can keep their equal ownership by taking part in a rights issue. When the shares are reduced, this feature is beneficial because it lets owners buy more shares for less than the current market price. Rights issues also give owners a fair and transparent way to increase their investment in a business they already trust.
B. Risks and considerations for investors
A rights issue can mean that a company is having money problems or that the value of current shares is going down, both of which hurt the share price. So, the company needs to carefully look at how the market feels, how much desire there is for the new shares, and how this might affect the current owners.
VII. Recent trends and developments
Companies often use rights issues to grow their businesses. The money the company raises is used to grow, so participating in a rights issue might pay off in the long run. An investor can only participate in a rights issue, though, if they meet the requirements. And the requirement is rights issues are given to shareholders based on how many shares they already own. A buyer must still own these stocks before the ex-date and record date, though.
A. Current scenario of rights issues in India
People who own shares can call a general meeting. They can also ask the company’s leaders to call an extra general meeting. The owners can contact the National Company Law Tribunal (NCLT) if the meeting is not held.
B. Emerging patterns and market dynamics
Rights issues of shares are a common way for businesses to raise money while allowing current owners to help the business grow. Companies and owners need to know how rights issues work and what they mean to make intelligent business choices and handle the complicated world of corporate finance.
VIII. Conclusion
Companies use rights issues of shares as an essential way to raise money, and present shareholders use them to keep their share of the company. Rights issues are a quick and cheap way to get money, which is suitable for both the company and its owners. Investors need to understand what a rights issue is and the complexities of rights issues so they can make intelligent choices, take advantage of good chances, and help the companies they believe in grow.
So, make sure you find a strong reason why the rights issue is essential. Just because there is a rights issue doesn’t mean that the problems that made the balance sheet weak in the first place will be fixed. Shareholders need to be careful.
FAQs
1. What is meant by a rights issue?
Investors in a company are given RI when the company offers them the chance to buy more shares directly from the company at a lower price than if they bought them on the secondary market.
2. Should I buy the right issue shares?
A rights issue of shares helps current shareholders by allowing them to buy shares at a lower price and keep their voting rights. However, the decision to buy them or not depends on a variety of factors, including your risk tolerance.
3. Can I sell my rights issue?
Shareholders can sell their rights issue. But if you’re a shareholder, before you make that decision, please develop a good understanding of what a rights issue is. Investors have a few choices when they receive rights. Investors can use them to buy the new shares at the exercise price. If an investor chooses not to purchase the new shares, they can sell the rights in the market instead.
4. What are the advantages of the rights issue?
Rights issues help shareholders safeguard their investment from the dilution that occurs when the company issues additional stock. Dilution might happen if existing shareholders sell their newly issued shares to other investors. However, this isn’t necessarily a given when there is a rights issue.
