What Is a Rights Issue?
A rights issue is providing rights to the existing shareholders of a company. This right gives the shareholders an opportunity to buy extra shares from the company at a discounted price than buying them in the secondary market. The number of extra shares that can be bought depends on the existing shares of the shareholders.
Should You Subscribe to the Rights Issue?
There can be multiple reasons why a company announces a rights issue. They might want to raise funds to fund capital expenditure, meet working capital requirements or repay debts. Understanding the purpose of the issue and how they will utilise the funds will help you determine whether to subscribe to the rights issue or not.
As an investor, you should look for two factors to understand whether you can subscribe to the issue or not:
- For whatever purpose the company is raising money, it should have strong earning potential in the future.
- The offer price of the rights issue is less or equal to the intrinsic value of the share.
Now, as an investor, there are a few options that you can choose from if you are holding shares in a company that has come up with rights issues.
- You can utilise your rights and subscribe to the offer.
- You can deny the rights and not subscribe to the offer.
- You can opt for ‘right entitlement’, where you sell your rights (to subscribe to the new shares) to someone else.
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