Understanding Rights Issue
Did you know, investors stood to make a 30% profit from the RIL Rights Issue*, India's largest-ever Rights Issue! But what is a Rights Issue? Rights Issue is a way in which companies invite existing shareholders to buy more shares, usually at a discounted price.
Discounts can be pretty crazy. I just went shopping for clothes and I got a 30% discount on 3 shirts. However, if I had bought only 2 shirts, no discount. Even if I had bought one, no discount. Company Rights Issues are a lot like this.
Come on, let’s learn more about this today.
Welcome to our new series, Learn with Upstox.
I’m Aaditya Iyengar and in this series we’ll be discussing some key aspects of fundamental analysis, corporate actions and some important general concepts about the stock market.
So, let’s discuss the topic of Rights Issue, in which we’re going to talk about – What are rights issues? When does a company give these? And who gets them?
What is a rights issue and who is it given to?
A rights issue is a company offering you the right to buy more shares. This means, the company is offering you a chance to increase your stake instead of giving it to an outsider or a new person. The existing shareholders get exclusive rights to buy more shares. This is done in ratios.
Recently, Reliance did this in a 1:15 ratio, wherein you had the chance to buy one extra share for a slightly lower price for every 15 shares you held.
A rights issue is just a way to raise more money. The only difference being that the capital is raised from existing shareholders instead of new shareholders. This helps shareholders to increase their stake in the company and the incentive to do so is a discount on the extra shares offered.
In the case of Reliance, the shareholders were given one extra share for every 15 shares they held at a discounted price of Rs. 1,257 per share, whereas the market price on the day of the issue was approximately Rs. 1,527 per share.
When does a company give a Rights Issue?
In the case of Rights Issue, you only get these rights if you own the shares on or before a specified record date, which the company announces. After this date, you cannot buy those extra shares. Companies prefer rights issues to normal stock issues because this method is non-dilutive. As existing shareholders are offered a bigger stake, new shareholders don’t dilute and reduce their ownership. Plus, in this case, the company’s existing directors also try to buy more shares as these shares are cheaper than the market price.
Always remember, the company owners and directors buying up more is a good sign. It shows that they believe in their own business.
Does this mean that a Rights Issue is always a good thing?
Well, that depends on what the business wants to do with the extra money that you give them. A company will always announce its plans to handle the extra capital when it announces the rights issue. As an investor, it’s only a smart decision to subscribe to a rights issue if you are satisfied with the company’s spending and expansion plan.
So that’s it for now. Thank you so much for watching our video on Rights Issues in our series, Learn with Upstox. I hope you learned something today.
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