Imagine you've invested in a company's share, and one day, you get an offer letter of "rights issue" from the company. What's that all about, and what should you do? Well, a rights issue means company is offering you, existing shareholder a chance to grab additional shares at discounted Price.
Curious about whether you should dive into this opportunity? Stay tuned, because we'll break down all you need to know about rights issues.
Decoding the Rights Issues
A Rights Issue of Shares is a corporate move where a company offers existing shareholders the chance to buy additional shares at a predetermined price, typically below the market value.
The number of additional shares that an investor can buy is in proportion to the investor’s existing shareholding.
Rights issue is optional- This means that an investor can choose whether to take up the offer or disregard it.
However, disregarding the rights issue will cause the investor’s existing share value to become diluted after the release of additional shares into the market. (Just imagine adding more water to your cocktail drink).
How Do Rights Issues Work?
A rights issue starts from the company announces to issue additional shares to the existing shareholders at a discounted rate. Here is the step-by-step process showing how a rights issue works:
The company issue offer letter rights issue to existing shareholders. It contains the subscription price, deadline, and other essential details.
Existing Shareholders holding stocks on the record date are eligible for the rights issue.
In preportion of existing holdings of the shareholders, the company offers the number of shares an shareholder can buy.
Shareholder has to subscribe the offer within the the specified offer period, unsubscribed portion may dispose off in the manner as the Board of Directors of the Company shall deem fit and in the best interests of the Company.
After the closure of the rights issue, the company starts the allotment process.
What’s the impact of not subscribing to the Rights Issue?
Deciding whether or not to subscribe to a rights issue involves understanding the potential impacts on your shareholding. The most significant impact is ownership dilution.
By not subscribing, you miss out on purchasing new shares at a potentially discounted price. As the company issues more shares, your existing shares represent a smaller percentage of the total ownership, reducing your voting power and potential future dividends.
Renunciation of Right Issue Shares
When shareholders decide not to take advantage of this opportunity, they can renounce their rights to purchase the additional shares. This means they transfer their entitlement to buy the additional shares to someone else. The shareholders who renounce their rights may sell these rights to other investors.
Are Rights Issues Suitable for All Investors?
Companies often issue rights shares to fund expansion, potentially offering long-term benefits, taking part in a rights issue may potentially pay off later on. Doing so will prevent the dilution of your existing voting power and also enjoy any potential reward from the expansion in the future.
On the contrary, if a company is under huge debt, and it announces a rights issue to repay the debt, it is wise to think twice before subscribing to the rights issue. If the market doesn’t perceive this rights issue positively, chances are you might lose more by taking up the rights.
Conclusion
Understanding rights issues empowers shareholders to make informed choices. By evaluating the company's financial position and the purpose behind the rights issue, investors can navigate this opportunity wisely, ensuring their investment aligns with their financial goals.
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