A Rights Offering, also recognised as a Right Issue of share, is a pivotal approach companies employ to bolster their capital reserves. This strategic method involves extending an invitation to the existing shareholders, granting them the exclusive opportunity to procure additional shares at a predetermined price. Importantly, this price is often set at a rate lower than the prevailing market value of the shares. The issuance of additional shares in a Rights Offering is allocated proportionally to the shareholders’ current holdings, generally in adherence to a predefined ratio. This enables shareholders to uphold their ownership stake in the company while potentially expanding their investment at a discounted rate.
Types of Rights Issue
There are primarily two types of rights issues. They include the following ones.
Renounceable Rights: Shareholders can transfer or sell their rights to purchase additional shares to third parties. Such rights are called renounceable rights. They can be traded on the stock market.
Non-Renounceable Rights: They do not give the shareholders the option to transfer or sell their rights to others. They can either exercise these rights by buying additional shares or let them expire.
Pros of Rights Offering
Equitable Option for Existing Shareholders: Rights offerings allow existing shareholders to maintain their proportional ownership in the company without dilution.
Capital Infusion: Companies can raise funds for various purposes such as debt reduction, expansion, or R&D without external borrowing.
Cost-Effective: Rights issues are usually more cost-effective compared to other methods of raising capital like public offerings.
Cons of Rights Offering
Potential Share Price Decline: The announcement of a rights issue might lead to a temporary decline in the share price due to the increased supply of shares.
Shareholder Dilution: If existing shareholders do not exercise their rights, their ownership percentage in the company decreases, leading to dilution.
Complexity and Time-Consuming: The process of rights issue involves administrative procedures, which can be complex and time-consuming.
Rights Offerings allow companies to raise capital while allowing existing shareholders to maintain their ownership. This method has its advantages and disadvantages, impacting both the company and its shareholders. For those interested in participating in such corporate actions or exploring investment opportunities, platforms like the BlinkX Trading App offer a user-friendly interface and access to various financial instruments. With BlinkX, users can stay updated on market trends, and trade stocks, and potentially take advantage of rights offerings to expand their investment portfolios.