Rights Issue and its relevance to shareholders explained with examples

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    36. Rights Issue and its relevance to shareholders explained with examples
Marketopedia / Stock Markets Basic / Rights Issue and its relevance to shareholders explained with examples


An Initial Public Offering marks the debut of a company in the share markets. The promoters of the business will typically make a portion of its shares available to investors. 

The main motivation for going public is to gain capital to finance growth initiatives or allow early investors to cash out. After the IPO goes on the exchange and begins trading, promoters may require more money. In such a scenario, they have three choices: Rights Issue, Offer for Sale and Follow-on Public Offer.

Rights Issue

Promoters can opt to generate additional capital from their existing investors by offering them additional shares at an affordable price (usually less than the Market Price). Generally, these new shares are offered in proportion to the quantity of shares the shareholder currently possesses. 

To explain further, a 1:4 Rights Issue would mean that for every 4 held shares, 1 more will be provided. Though this appears attractive, it restricts the company from raising finances from a limited group of investors which already possess its stocks and are likely unwilling to make any extra investments. Moreover, such issues have a dilutive outcome on the value of the earlier owned shares.