Introduction

In this article you will learn about " Right Issue Of Shares" in simple language so than you will be able to understand it. Right Issue of shares is an invitation to existing shareholders to purchase additional new shares in the company at a discount to the market price on a stated future date. In a Right Issue, a company gives shares only to existing shareholders at a certain ratio to the number of shares they already own. For example, one right share may be given for every five shares owned. Usually a company offers rights issue at a price which is lower than the market price of the shares so that existing shareholders may get the monetary benefit of their association with the company. 
As per section 62(1) of Companies Act 2013 where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall offered to persons who, at the date of the offer ,are holders of equity shares of the company in proportion. 



Features of "Right Issue of Shares"-

  • A right issue of shares gives existing shareholders preferential benefits. 
  • The existing shareholders only get the right not the obligation to purchase more shares of the company. 
  • The shares usually issued at a price which is lower than the market price of the shares. 
  • Rights issue is made for raising funds for the company. 
  • In right issue, if the company does not receive a minimum subscription, the entire money received shall be returned. 
  • Rights shares may be partly paid. 
  • Right share bring cash to the company. 

Reason for "Right Issue of Shares"-

The company offers rights issue when it needs capital. Rights issue is made for raising funds for the company. Company could use this capital for clearing its  debt obligation, acquire assets and facilitate expansion without having to take out a loan from bank. 


Types of Right Issue 

1. Renounceable right issue:-

In this type, existing shareholders has the right to transfer the right to subscribe rights issue of share to anyone who may not be even the shareholder of the company. 

2. Non - Renounceable right issue:-

In this type, shareholders has only two options available , either to skip or purchase the share . They are not allowed to  transfer the right to subscribe. 


Advantages of right issue

  • Right issue of shares is an opportunity to existing shareholders to increase their stake in a company at a reduced cost. 
  • It is cheaper than the public issue of shares.
  • Right shares may be partly paid up. 
  • Right issue of shares allow companies to raise capital from existing shareholders without involvement of external source of financing. 
  • They were a fast source for companies to raise funds. 

Disadvantages of right issue

  • Existing shareholding percentage may get diluted. 
  • The company may not able to raise capital and fail to achieve their target if shareholders not purchase right issue. 
  • Issuing shares may be cause in the company being Overcapitalized which can be dangerous for company's  financial health .