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.