Isn’t it like a Diwali bonanza or in financial terms, a Ponzi scheme?!
A deluge of rights issues raised money from the market in the last couple of years and some more are in the race, which has announced to raise money via the rights issue.
So, first of all, let us understand why there is a need for a rights issue!
There are two types of capital that companies can use to finance their operations i.e. debt and equity. With debt financing, the company has to repay the amount borrowed with interest but with equity financing, there is no obligation to repay the shareholders.
In a rights issue, the company raises funds by issuing more shares to its existing shareholders.
How do rights issues work?
If you are an existing shareholder of the company, you get the ‘right’ to buy additional shares in a certain ratio and at a certain price, which usually is at a discounted rate from the current market price. For example, a 5:1 issue means that you get the right to buy one share for every five shares you own. Rights are offered to only those shareholders whose names exist on the register of shareholders of the company on a record date, which usually happens a few days after shareholders approve the proposal to raise money through rights.
From the above description, I’m sure you must have got a clear idea about the rights issue. However, the crux of the article is that beyond the…
