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Rights issue

  • Published: Friday, 16 October 2020

A rights issue is for raising fresh capital. The company, instead of going public, approaches its shareholders with an option to subscribe to it in the proportion to their shareholding. It’s like an IPO for a selected group. A 1:4 rights issue means for every 4 shares held, the shareholder can subscribe to 1 additional share. 

But unlike bonuses, it comes at a cost that is lower than the prevalent market price otherwise buying from the open market would be more sensible. Shareholders must be convinced of the future prospects of the company. Usually, rights issues indicate that management is confident about future growth prospects.