BAJAJ BROKING
February 27, 2025
10 mins read
A rights issue is a method companies use to raise capital by offering existing shareholders the opportunity to purchase additional shares at a discounted price. This process helps the company secure funds without involving external investors, allowing current shareholders to maintain their ownership proportion and avoid dilution.
The right issue of shares follows a structured approach where the company announces the issue, sets a subscription price, and provides shareholders a limited timeframe to subscribe. The subscription price is typically lower than the market price, making it an attractive investment opportunity. Shareholders who do not wish to subscribe can often sell their rights in the open market to other investors who may find value in purchasing additional shares at a discount.
The rights issue benefits companies by providing an efficient way to raise funds for expansion, debt reduction, or strategic investments. At the same time, it allows shareholders to acquire more shares at favorable terms, ensuring they retain their proportional ownership in the company while also benefiting from long-term growth.
Announcement of Rights Issue: The company announces the rights issue, specifying the purpose, subscription ratio, and discounted price for existing shareholders. This announcement provides shareholders with clarity on how many additional shares they can buy.
Proportional Allocation: Shareholders receive the right to buy extra shares in proportion to their existing holdings, ensuring they maintain their ownership stake in the company.
Subscription Price Determination: The company sets a subscription price lower than the market value to encourage participation in the right issue of shares, making it a more attractive investment.
Trading of Rights: In some cases, shareholders who do not wish to subscribe can sell their rights in the stock market, allowing other investors to buy shares at a discount.
Exercise Period: A limited time is given to shareholders to exercise their rights. If they do not act within the timeframe, their rights may expire and become worthless.
Issuance of New Shares: Once the subscription period ends, the company allots new shares to shareholders who participated in the rights issue, providing the company with additional capital.
Market Impact: The share price may fluctuate based on investor sentiment and how efficiently the company utilizes the funds raised through the right issue of shares.
Discounted Share Price: A rights issue allows existing shareholders to buy additional shares at a lower price than the market value. This discount serves as an incentive, encouraging participation and making the investment opportunity more attractive.
Proportional Allocation: The number of shares a shareholder can purchase is based on their existing holdings. For example, a 1:5 right issue of shares means one additional share can be bought for every five held, helping maintain proportional ownership.
Exclusive to Existing Shareholders: The rights issue is available only to current shareholders, ensuring that existing investors have the first opportunity to acquire new shares before external parties.
Voluntary Participation: Shareholders are not obligated to participate in the right issue of shares. They can choose to subscribe, sell their rights if tradeable, or simply let them expire.
Time-Bound Offer: The rights issue comes with a fixed subscription period. If shareholders do not act within the timeframe, the rights expire, and they lose the opportunity to purchase discounted shares.
Tradeability of Rights: In some cases, shareholders can trade their rights in the stock market, allowing others to purchase them and benefit from the discount. This provides flexibility for investors who do not wish to subscribe.
Fundraising Without External Dilution: Since only existing shareholders can buy new shares, their proportional ownership remains unchanged. The right issue of shares prevents dilution from external investors.
Cost-Effective Capital Raising: A rights issue is a more affordable way for companies to raise funds compared to issuing debt or conducting a public offering. It involves fewer regulatory requirements and lower costs.
Market Impact: The announcement of a rights issue can lead to initial stock price fluctuations. The price may decline due to the dilution effect, but if the funds are used effectively, the company’s valuation may improve.
Use of Raised Capital: Companies use funds from a rights issue for expansion, debt repayment, acquisitions, or improving working capital. Effective utilization can enhance business growth and profitability.
Impact on Shareholder Value: While a rights issue gives shareholders a chance to buy shares at a discount, it may also lead to fluctuations in the stock price. The long-term impact depends on how the company deploys the additional capital.
Capital Expansion: A rights issue helps companies raise funds for business expansion, infrastructure development, or acquiring new assets to drive future growth. Expanding operations requires significant capital, and issuing rights shares ensures that funds are raised without increasing debt.
Debt Reduction: Companies use funds from a right issue of shares to repay outstanding debts, reducing interest expenses and improving financial stability. Lower debt levels enhance creditworthiness and free up resources for other operational needs.
Strategic Investments: A rights issue provides capital for mergers, acquisitions, and investments in new technologies or business verticals. These investments help companies strengthen market positioning and create new revenue streams.
Working Capital Requirements: Companies issue rights shares to meet short-term financial needs, ensuring smooth day-to-day operations. Maintaining adequate working capital is essential for sustainability and business efficiency.
Research and Development: Industries relying on innovation utilize a rights issue to fund R&D activities, helping improve products, develop new technologies, and maintain competitiveness in the market.
Market Conditions and Opportunities: Favorable market sentiment may encourage companies to issue rights shares, allowing them to capitalize on investor confidence and raise funds under favorable terms.
Regulatory Compliance and Restructuring: Companies issue a right issue of shares to meet regulatory requirements, restructure capital, or maintain operational efficiency by realigning financial resources.
Avoiding External Borrowing: A rights issue provides an alternative to bank loans or external financing, reducing reliance on debt while raising necessary capital from existing shareholders.
Maintaining Shareholder Ownership: Issuing rights shares prevents dilution by allowing existing shareholders to maintain their proportional stake in the company, ensuring control remains within the current investor base.
Liquidity Enhancement: A rights issue increases the number of outstanding shares, potentially improving stock liquidity in the market. Higher liquidity ensures better price discovery and trading opportunities for investors.
Scenario: XYZ Ltd. announces a rights issue in a 1:5 ratio at ₹80 per share.
Existing Shares: An investor holds 500 shares at ₹100 each.
Rights Allocation:
500 × 15 = 100 new shares available.
Investment Required:
100 × 80 = ₹8,000.
Post-Issue Share Price: Adjusts based on market response to the right issue of shares and the company's fund utilization.
Investor Impact: If the share price remains above ₹80, the investor benefits from acquiring shares at a discount.
Determining the Number of Rights Shares:
The number of shares a shareholder can buy depends on the rights issue ratio.
Formula: Rights Shares = Existing Shares × Rights Issue Ratio
Example: If an investor holds 500 shares and the right issue of shares ratio is 1:5, they can buy:
500 × 15 = 100 new shares
Total Investment Required:
Shareholders must pay the subscription price for the new shares.
Formula: Total Cost = Rights Shares × Subscription Price
Example: If the subscription price is ₹80 per share,
then: 100 × 80 = ₹8,000
Post-Issue Share Price Calculation:
Theoretical ex-rights price (TERP) estimates the new share price post rights issue.
Formula: TERP = (Old Shares×Market Price)+(Rights Shares×Subscription Price)Total Shares After Issue
Example: If the market price is ₹100, TERP calculation would be adjusted based on the number of shares and price levels.
Impact on Portfolio Value:
The revised portfolio value is determined by:
New Portfolio Value = Original Investment + Investment in Rights Issue
The portfolio’s per-share value may fluctuate based on market response to the rights issue and overall investor sentiment.
Breakeven Price Calculation:
Investors assess the breakeven price post-issue using: Breakeven Price = Total InvestmentTotal Shares After Issue
This helps investors evaluate their return expectations from the right issue of shares, and thus determine if the investment aligns with their financial goals.
Opportunity to Acquire More Shares: A rights issue allows existing shareholders to buy additional shares at a discounted price, increasing their ownership stake without external dilution.
Discounted Share Price: The shares offered in a right issue of shares are usually priced lower than the market value, making it an attractive investment opportunity for shareholders looking to expand their holdings.
Maintaining Ownership Percentage: Shareholders who subscribe to the rights issue can retain their proportional ownership, preventing dilution from new investors entering the company and affecting their control.
Increased Future Returns Potential: If the company effectively utilizes the raised funds, the rights issue may contribute to business growth, potentially increasing share value and benefiting long-term shareholders.
Flexibility to Sell Rights: In cases where rights are tradeable, shareholders who do not wish to subscribe can sell their rights on the stock exchange, earning a premium instead of letting them expire.
Cost-Effective Investment: Since shares are available at a lower price, shareholders can increase their holdings at a reduced cost, improving their overall investment position while maximizing returns.
Reduced Volatility Risk: Shareholders acquiring shares through a rights issue at a discount may experience reduced exposure to short-term market fluctuations.
Stronger Dividend Potential: If the company performs well after the right issue of shares, shareholders who increased their holdings may benefit from higher dividends in the future.
Improved Liquidity: More shares in the market due to the rights issue can enhance liquidity, making it easier for shareholders to buy or sell shares.
Confidence in Business Growth: A right issue of shares is often initiated for expansion or debt repayment, signaling potential future stability and profitability, reassuring investors.
Dilution of Share Value: A rights issue increases the number of shares in circulation, which can reduce the value per share if demand does not rise accordingly.
Negative Market Perception: Investors may view a right issue of shares as a sign of financial distress, leading to a decline in stock price.
Short-Term Price Volatility: The stock price may drop temporarily due to the discounted pricing, affecting existing shareholders’ portfolio value.
Obligation to Invest More: Shareholders who wish to maintain their ownership proportion must invest additional capital in the rights issue, which may not always be feasible.
Unused Rights May Expire: If shareholders do not act within the specified period, their rights expire, causing a missed investment opportunity.
Uncertain Future Performance: If the funds raised are not used effectively, the rights issue may fail to improve the company’s financial position or profitability.
Limited Participation in Non-Tradeable Rights: If rights are not tradeable, shareholders unable to invest miss out on potential benefits.
Check the Rights Issue Announcement: Review the company’s official announcement to understand the subscription ratio, issue price, eligibility, and deadline for the rights issue.
Log into Your Demat Account: Access your brokerage or bank’s trading portal where the right issue of shares is listed. Ensure your account is linked to a valid PAN and bank account for a smooth transaction.
Navigate to the Rights Issue Section: Locate the rights issue option under the corporate actions or IPO section of your brokerage platform and confirm your entitlement.
Select the Number of Shares: Enter the number of rights shares you wish to apply for based on your entitlement. You may also apply for additional shares if permitted.
Make the Payment: Pay using net banking, UPI, or ASBA (Application Supported by Blocked Amount), where funds remain blocked until allotment.
Submit Your Application: Verify all details, confirm, and submit your application before the deadline to ensure successful processing.
Check Allotment Status: After the issue closes, verify the allotment of shares in your Demat account and track investment updates.
A rights issue is a valuable financial tool for companies to raise capital while allowing existing shareholders to expand their investment at a discounted price. It helps businesses grow, reduce debt, and strengthen financial stability. However, investors must evaluate the company’s plans before subscribing to ensure that the right issue of shares aligns with their financial goals and risk appetite.
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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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A right issue of shares allows a company to offer additional shares to existing shareholders at a discounted price. It enables companies to raise capital without diluting ownership among external investors. Shareholders can purchase shares proportionate to their current holdings or trade their rights if allowed.
A right issue of shares can benefit existing shareholders by offering discounted shares, allowing them to maintain or increase their ownership. However, if they do not participate, their percentage of ownership may be diluted. The market price may also adjust due to the increased number of outstanding shares.
A right issue of shares allows shareholders to buy additional shares at a discount, helping them strengthen their stake. It offers a cost-effective investment, maintains proportional ownership, and can provide long-term gains if the company effectively utilizes the raised capital for growth or debt reduction.
Yes, shareholders can sell their rights if the right issue of shares is renounceable. This means they can transfer their rights to another investor in the open market. If the rights are non-renounceable, shareholders must either subscribe or let the offer expire without compensation.
The subscription price in a right issue of shares is set below the market price to attract shareholder participation. It is determined by the company based on financial needs, market conditions, and investor demand while ensuring that it raises adequate funds without excessive dilution.
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