What is the Rights Issue?

About Rights Issue:

• A rights issue is an offering of rights to the existing shareholders of a company that gives them an opportunity to buy additional shares directly from the company at a discounted price rather than buying them in the secondary market. 
• It gives preferential treatment to existing shareholders, where they are given the right (not obligation) to purchase shares at a lower price on or before a specified date.
• The number of additional shares that can be bought depends on the existing holdings of the shareowners.
• Until the date at which the new shares can be purchased, shareholders may trade the rights on the market the same way that they would trade ordinary shares.
• Existing shareholders can also choose to ignore the rights; however, if they do not purchase additional shares, then their existing shareholding will be diluted post-issue of additional shares.
• Dilution occurs because a rights offering spreads a company’s net profit over a larger number of shares. Thus, the company’s earnings per share, or EPS, decreases as the allocated earnings result in share dilution.
• Why issue a Rights Offering?
  • Companies most commonly issue a rights offering to raise additional capital.  A company may need extra capital to meet its current financial obligations. 
  • Troubled companies typically use rights issues to pay down debt, especially when they are unable to borrow more money.