Rights issue of shares is an offering given to existing shareholders enabling them to purchase additional shares to raise their capital at discounted prices. If one is eligible for the rights issue, they can fill the application form and pay the necessary amount to purchase the new shares.
Rights Issue Of Shares
A rights issue of shares is a way for a company to raise more money from its existing shareholders.
Here’s how it works:
1. Announcement: All the company tells its current shareholders that it wants to uplift more money by providing new shares. They do fund new projects and pay off debt, or for other financial needs.
2. Offer to Existing Shareholders: Current shareholders are given the chance to buy more shares at a special discounted price. This is a benefit for them because they can buy more shares for less money than new investors.
3. Ratio: The company will be clear about how many new shares you can buy for every share you already own. For example, it might be 1 new share for every 5 you have.
4. Decision: A shareholder can confirm if they want to become interested in up the offer and buy more other shares or not. They can also sell or trade their rights to others.
5. Payment: If you want to choose to buy more shares, then you will need to pay for them at the discounted price.
6. New Shares: After the process is done, you will have more shares in the company.
What Is Rights Entitlement?
Right entitlement is the number of shares an existing shareholder can purchase at a discounted price under the rights issue. This number is usually based on the rights ratio. Rights ratio is the ratio of existing shares owned by the person to the additional shares that they are entitled to. For example if the rights ratio is 1:3 and the person owns 90 shares, then they can buy an additional 30 shares. Or if the rights ratio is 2:3 and the person owns 90 shares then they can buy an additional 60 shares.
Who is Eligible for the Rights Issue?
Generally existing shareholders of the company who meet the criteria specified by it are eligible for the rights issue. Here’s a detailed explanation on how a company determines your eligibility:
Existing shareholder:
You should be a shareholder in the company on the record date, which is a date determined by the company itself to decide which shareholders can apply for rights issues.
Rights entitlement
Rights entitlement is the number of shares you own in the company and that is a major factor in deciding whether you will be eligible for rights issue or not.
Unpaid dues:
To be eligible, it is important for you to pay all your dues beforehand.
Right Issue Of Shares Calculation
Rights issue calculations help you determine the number of shares that you are entitled to and the amount you will have to pay for them. Here are some important terms you should know:
Rights entitlement:
This is the number of shares that you are entitled to. It depends on the rights ratio, for example, if the rights ratio is 1:4 and you own 100 shares, then you can purchase 20 more.
Number of rights shares:
Number of rights shares is calculated by multiplying the rights entitlement to the number of existing shares you have.
Rights issue price:
Rights issue price is the discounted cost of one share at which you can purchase new shares. Total cost can be calculated by multiplying rights issue price with the number of rights shares that you wish to purchase.
How To Apply For Rights Issue?
To apply for a rights issue, the first step would be to get in touch with the financial institution and gather all the necessary information. Usually companies announce the necessary details of the rights issue, such as the record date, subscription period, rights issue price and rights entitlement ratio through an official notice addressed to shareholders.
The next step is to fill out a form specifying necessary details like the number of shares you wish to purchase.
Then you will have to pay additional money i.e. the cost of the shares that you are going to buy.
As the last step, you need to submit the application form and the dues to the financial institution.
How To Apply For Rights Issue – Quick Summary
- A rights issue of shares is a way for a company to raise more money from its existing shareholders.
- One can apply for the rights share price by filling the application form and clearing all the necessary dues if one meets all eligibility criteria.
- Rights issue price can have numerous benefits for the existing shareholders of the company while it can also be beneficial for the company itself, allowing it to raise capital.
- But before applying, one must be familiar with the basic terms related to rights issues such as rights ratio (set by the company), rights entitlement (determined with the help of rights ratio) and rights issue price.
- You can know more about trading and related terms through Alice Blue which offers stock trading services at low charges.
Frequently Asked Questions
01. What is the Procedure to Apply for a Rights Issue?
If one is eligible for the rights issue, they can fill the application form and pay the necessary dues to purchase the new shares.
02. What is the Procedure for the Rights Issue of Shares?
Usually companies announce the rights issue through an official notice. It is the company who decides the rights entitlement, rights ratio and the price of the shares. The company announces the rights issue while specifying details like record date and subscription period.
03. Is the Rights Issue Good for Investors?
Rights issue has its own pros and cons. Here are a few:
Pros:
Shareholders get a discounted share of prices.
One can increase their ownership percentage in the company’s shares.
Investing more in the company might be beneficial in the long run considering the growth prospects.
Cons:
Applying for a rights issue might be risky if the company’s financial state is weak.
04. Is it Mandatory to Apply for a Rights Issue?
No, it is not at all mandatory to apply for rights issues. Shareholders are offered a choice to either purchase additional shares or decline the offer.
05. Is the Rights Issue Profitable?
Profitability of the rights issue depends on various factors such as the financial health of the company, the discount offered, long term growth and investment strategies. If the company is financially weak, or discount rates offered are really low, it is better to not apply for the rights issue.
