Rights issue

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When doing a Secondary Market Offering of shares to raise money, a company can opt to do a rights issue to raise equity. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified attractive price within a specified time.

Rights can be renounceable(can be sold separately from the share to other investors during the life of the right) or non-renounceable (shareholders must either take up the rights or let them lapse. Once the rights have lapsed, they no longer exist).

To issue rights the financial manager has to role baithke:

• Subscription price per new share
• number of new shares to be sold
• the value of rights
• the effect of rights on the value of the current share
• the effect of rights to existing and new shareholders

A right to a share, generally issued on ratio basis( e.g one-for-three rights issue). Because the company is getting the shareholders' money in exchange for issuing rights, a rights issue is a source of funds for the company issuing it.