Rights Issue
Quick Definition
A capital-raising method where a company offers existing shareholders the right to purchase additional shares at a discount to the current market price.
Key Takeaways
- Rights issues let existing shareholders buy new shares at a discount.
- They raise capital but dilute non-participating shareholders.
- Rights may be renounceable (sellable) or non-renounceable (use or lose).
What Is Rights Issue?
A rights issue (or rights offering) is a method companies use to raise additional capital by offering existing shareholders the opportunity to buy new shares at a discount to the current market price, in proportion to their existing holdings. For example, a 1-for-5 rights issue means shareholders can buy 1 new share for every 5 they currently own. The subscription price is typically set 15-30% below the market price to incentivize participation. Shareholders who don't wish to exercise their rights can often sell them on the market (renounceable rights) or let them expire (non-renounceable rights). Rights issues are common among companies needing capital for expansion, debt reduction, or to shore up balance sheets. While they raise capital without taking on debt, rights issues dilute shareholders who don't participate and can signal to the market that the company needs money, sometimes depressing the stock price.
Rights Issue Example
- 1A bank announced a $5 billion rights issue at a 25% discount to fund regulatory capital requirements.
- 2Shareholders received 1 right for each share held, with 3 rights needed to buy 1 new share at $40 (market price: $55).
Related Terms
Secondary Offering
The sale of new or previously held shares after a company's initial public offering, used to raise additional capital or allow insiders to sell their stakes.
Outstanding Shares
The total number of shares of a company's stock currently held by all shareholders, including institutional investors, insiders, and the public.
Ex-Rights Date
The first trading day on which new buyers of a stock are no longer entitled to participate in a rights offering.
Float (Stock Float)
The number of shares available for public trading, excluding insider holdings, restricted shares, and closely held shares.
Issued Shares
The total number of shares a company has sold and distributed to shareholders, including treasury shares.
Stock
A security representing ownership in a corporation, entitling the holder to a share of profits and voting rights.
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