What is rights issue of shares?

RIGHTS ISSUE OF SHARES.

When a company issue or offer its shares to their existing shareholders it is known as Rights issue of shares.  

Rights issue of shares is directly related to equity shareholders. Rights issue is a type equity fund raising. After the IPO (Initial Public Offer) if the company want's to raise funds they can raise it through taking debt, Rights issue of shares or by FPO (Follow on Public Offer). But Before raising funds through FPO the company must offer the Shares to their existing equity share holders at discounted rate.

For example (The market price of the share is Rs.1000 and the company offers it at Rs.900 to its existing shareholders then it is giving 10% discount.) It is the right of the shareholders, that's why it is known as Rights issue of shares.

If the company fails to raise the required funds through Rights issue of shares, then it can go for FPO.

• Who can participate in Rights issue of shares?

Only the existing equity shareholders, Promoters, and the Retail investors can participate in Rights issue of shares. The shareholders must have the company's shares on the record date which is declared by company or by the directors of the company. The directors of the company decides that who can participate in the Rights issue of shares.

• Benefits of Rights issue of shares.

The major benefit of Rights issue of shares is that the existing shareholders gets the shares at discounted price and not at the market price, because of this the relationship between the company and the shareholders gets stronger, and it helps the company to earn the shareholders loyalty.

• Why the company do not go for debt instead of rights issue of shares?

If the company uses debt instruments instead of equities to raise funds it will increase the company's D/E ratio (Debt to Equity Ratio), and it indicates that the company has huge amount of debt on it, and it will also impact badly on the share price of the company.

HAPPY INVESTING.