What is the Rights Issue?

About Rights Issue:

 

• A rights issue is an invitation to existing shareholders to purchase additional new shares in the company.  
• This type of issue gives existing shareholders securities called rights.  
• With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date.
• The company is giving shareholders a chance to increase their exposure to the stock at a discount price.
• Until the date at which the new shares can be purchased, shareholders may trade the rights on the market the same way that they would trade ordinary shares.
• The rights issued to a shareholder have value, thus compensating current shareholders for the future dilution of their existing shares' value.
• Dilution occurs because a rights offering spreads a company’s net profit over a larger number of shares. Thus, the company’s earnings per share, or EPS, decreases as the allocated earnings result in share dilution.

 

Why Issue a Rights Offering?

• Companies most commonly issue a rights offering to raise additional capital. 
• A company may need extra capital to meet its current financial obligations. 
• Troubled companies typically use rights issues to pay down debt, especially when they are unable to borrow more money.

 

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Q1) What are equity shares?

Equity shares are long-term financing sources for any company. These shares are issued to the general public and are non-redeemable in nature. Investors in such shares hold the right to vote, share profits and claim assets of a company. The value in case of equity shares can be expressed in various terms like par value, face value, book value and so on.

Source: After BPCL, IOC announces rights issue