What is the Rights Issue?

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What is the Rights Issue? Blog Image

Overview:

Indian Oil Corporation (IOC) plans to raise capital through rights issue of equity shares as part of a government's plan to infuse capital into three state-owned fuel retailers to fund their net zero carbon emission projects.

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.

 


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