Question

Discuss the key features of a rights issue as a way of raising equity finance

Answer 1

Rights Issue is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. The company is under legal obligation to offer first the further issue of the shares to its existing shareholders. But the holders have option either to accept it or to reject or renounce it.

Advantages of Right Issue

The following are the main advantages of right issue:

1. Right issue gives the existing shareholders an opportunity to maintain their pro-rata share in the earning and surplus of the company and the voting power as before.

2. The goodwill of the company increases in the eyes of existing shareholders.

3. The cost of issue of such shares will also be lower.

4. No pressure of selling the shares.

5. If right shares are offered by the shareholders enthusiastically, it proves that financial position of the company is sufficiently good, and the company can obtain more loans at lower rate of interest.