Right Issue of Shares Explained: Meaning, Benefits, and Key Procedures

The right issue of shares is the process through which a company raises funds by issuing more shares of the same company to its existing shareholders. As a result, the organisation raises funds for implementing certain projects or paying off loans without “adding to its debt burden.”. In this article, we will talk about the right issue of shares: what it means, how it works, why companies do it, and what rules they must follow. We will also look at some issues that have yet to come, such as new rights issues planned by several companies, what is right issue, right issue meaning, right issue procedure, etc.

What is Right Issue?

A right issue means giving existing shareholders the option to purchase more shares in the company before anyone else. These shares are offered at a lower price than the current market value, which makes it attractive for shareholders. A company chooses the right issue method to raise capital from people who already trust and believe in it—its shareholders. This process makes available the opportunity for a shareholder to increase his percentage equity in the firm when he decides to purchase those extra shares.

Example: Assume that a company issues a right issue of shares at 1:5. This means that for every five shares held by a shareholder, the shareholder is granted an option to buy another share at a lower price. The issue of rights in shares enables companies to raise funds while allowing the shareholders to retain and even increase their ownership levels.

Definition of Right Issue of Shares

The term “right issue” literally means giving shareholders a “right” to buy more shares. It enables them to exercise a share in the company’s growth by investing more money at discount value. They purchase them at a lower rate than on the stock market. Right issue of shares are preferred as they benefit existing shareholders. If they do not want to invest in even one extra right, they can sell it to a third person.

More simply, a right issue is when a company sells more shares to its existing shareholders. Essentially, it is a means through which the company obtains its share of funds directly from those shareholders owning shares. It is significant because shareholders retain a percentage of ownership while helping the firm expand further.

Right Issue Procedure

A right issue of shares follows the proper procedure in several important steps, which ensure the right and organised process. This is what one looks like:

1. First off, the board of directors approves the right issue after which they decide on the number of shares offered along with the price per share.
2. Public notice by the Company: Next, the Company issues a public declaration to all its shareholders, informing them that it plans to offer this option. It provides information on the right issuing ratio, discount price, and time for acceptance.
3. Record date: A record date is chosen, and only shareholders whose names appear on this record date are allowed to avail of their rights. Therefore, the ownership of that share is transferred to these shareholders.
4. Right Entitlement: Depending on the number of shares held by the shareholders, they get an entitlement to purchase additional shares. They either exercise to buy additional shares or sell their rights to any other person.
5. Subscription Period: In this regard, the concerned company designs a specific time frame wherein those shareholders should respond. In the subscription period, shareholders decide either to exercise their options for buying more shares or selling their rights.
6. Distribution of Shares: The company issues shares, after the subscription period is over, to those people who have opted for buying them. The company can issue unclaimed shares to other investors if there are any.

These steps make the right issue procedure smooth and fair for all the parties involved with it. Each step is well-calculated so that the shareholders get enough time to decide.

Advantages of Right Issue

Right issue of shares has many advantages for companies and owners. Let’s consider the main advantages of right issue:

• Retention of Control: The right issue of shares ensures that the current shareholders do not lose control over their shares. They can purchase additional shares and retain the same percentage of ownership as the company issues new shares.
• Less Expensive: A rights issue is often cheaper than a public issue because it incurs fewer legal and advertising expenses.
• Quick Access to Funds: A right issue of shares facilitates an immediate source of raising funds without piling up extra debt. This is beneficial to companies that require funds urgently.
• Increased Market Confidence: If a company issues the right issue, it conveys confidence in its future plans. It makes the stock price of a company rise as investors find it a sound company.

The shareholders can sell their rights on the market, if they do not like to buy more shares. It provides the advantages of liquidity and flexibility. These advantages make the right issues an attractive option for companies and a golden opportunity for shareholders to strengthen their investments.

SEBI Guidelines for Right Issue

The Securities and Exchange Board of India has rules relating to rights issues pertaining to shares. Such is the belief in today’s modern world that only justifies how companies should, in all fairness, communicate openly, fairly, and transparently with others. The essentials by which SEBI restricts the right issue are enumerated below:

• Eligibility Conditions: No firm has the right to carry out a right issue. SEBI has some financial requirements, such as net worth and profitability, which a company needs to meet before conducting the right issue.
• Full Disclosure: Companies must tell their shareholders the reasons why they are raising funds and how they will use the funds. SEBI mandates full disclosure so that shareholders know where their money is going.
• Timeline and Deadlines: SEBI has mandated specific timelines for each stage of the process for the right issue, including the date of announcement, record date, and subscription period.
• Rights Trading: The company should inform the shareholders regarding the rights to be traded on the stock exchanges. It enables the shareholders to sell their rights in the stock exchange if they intend to refrain from exercising the option of buying more shares.

SEBI regulations guarantee that Shareholders are protected and companies do not resort to any unfair practice while conducting the right issue. These regulations are sure to bring out clarity and ensure that the rights issue is a fair deal for one and all.

Upcoming Rights Issue Expected

Upcoming rights issues are those companies’ planned new right issues of shares. Investors will more than likely pay attention to these because they have the chance to purchase shares at a lower price. Some examples of upcoming rights issues by companies are listed below:

• South Indian Bank: It is planning the right issue to raise funds to fuel growth and operational needs. Shareholders may buy additional shares at a special rate. This company will issue rights to raise capital for further business expansion.
• Nagreeka Exports: This textile house has declared a rights issue to finance some new undertakings.

These upcoming rights issues are available for shareholders to buy shares which are new from the company under their respective rights. The Investor has to evaluate the financial position of each company with respect to each one’s growth aspirations before they decide to Subscribe to the rights issues.

Conclusion

Right issues are, therefore, useful mechanisms through which companies can raise capital and, at the same time, offer shareholders a chance to increase investment in a company they think well of. Access to funds for realising goals, which might be expansion, new projects, or repayment of debts, for example, is relatively rapid for companies when using the right issues. To a shareholder, it allows him to buy shares at a reduced price, depending on the performance of the company.

However, with the right issue meaning being well-versed with the right issue procedure and SEBI guidelines, there is indeed a lot on the plate. Through the process of the right issue, stakeholders can facilitate the expansion of ventures in which they see potential and simultaneously increase their gains. SMC Global Securities can guide investors through future rights issues and other financial tools as they decide on such investments.

FAQs on Right Issue of Shares

1. What is Right Issue of Shares?

A right issue is a technique a firm uses to raise funds by issuing extra shares to existing shareholders at a reduced price. This enables the shareholder to buy more shares and have a higher percentage of the firm’s equity.

2. Why do firms opt for the right issues?

Firms opt for the right issues to finance various goals that include,

• Business expansion
• For financing a new venture or acquisition
• For loan repayment
• To strengthen its balance sheet

3. How does the Right Issue Work?

A right issue consists of the following process:

• Board Approval: The company’s board of directors gives its nod to the right issue
• Announcement: The company declares the right issue, offer price, ratio, and record date.
• Record Date: Those shareholders who hold shares in their accounts on the record date are entitled to rights.
• Rights Entitlement: Shareholders can purchase extra shares according to their existing shareholding.
• Subscription Period: Shareholders can exercise their rights to buy additional shares within a specified period.
• Allotment of Shares: Shares are issued to shareholders as per their exercised rights.

4. What are the Benefits of the Right Issue of shares?

The following are the benefits of a right issue:

• No Dilution of Percentage of Existing Shareholders
• Low cost as compared to public issues
• Faster access to funds
• Enhanced market confidence and a good attitude towards the company.
• Shareholders can exercise or sell their rights.

5. What are the SEBI Guidelines for Right Issues?

SEBI has certain guidelines for the right issues so that it is practised fairly:

• Eligibility Criterion: Companies must possess some specified financial criteria.
• Full Disclosure: Companies must provide all relevant information to the shareholders.
• Time Lines: SEBI provides certain timelines for the procedure for the right issue.
• Trading in Rights: Shareholders can trade their rights on stock exchanges.

Author: All Content is verified by SMC Global Securities.