What right issue?
Defining a Right issue
The right issue is an issue through which a company raises additional capital from its existing shareholder to fulfill its current financial obligation. Generally, a troubled company takes out the right issue so that it can pay its debt. Companies declare the right issue especially when they are unable to borrow more money.
Important
Good companies with healthy financial conditions might also raise the capital through a right issues to expand their business, acquire new facilities, etc.
However, not all troubled companies issue a right issue but good companies with having a good balance sheet may also be declared a right issue. Generally, good companies announce the right issue to raise the additional capital to expand their company’s business, acquiring manufacturing or sales units.
If the company uses the capital raised from the rights issue to expand its business, then it can lead to increased capital gains for the shareholders.
The Right issue gives to a select group of people (existing
shareholders). Right issue discount price per issue is from the market
price.
So,
Understand the concept with an example.
Suppose, you own 1000 shares of reliance Ltd, the market price of each share is rs2500. The company needs to raise the capital to pay its debts and meet its other financial obligation. Reliance, therefore, announces a right offering through which plan to raise rs500 crores by issuing 25 lakhs share to their existing shareholder at a price of rs200 each. But company issue rights to their existing shareholder in 1:4. In other words, for 1 of every 4 shares you hold. Reliance Ltd. Is offering you a discounted price of rs2000 each share. This price is less than the rs500 prices at which reliance stock trades in stock exchanges.