What is a Right Issue?

Exclusive Offer: Unveiling the Benefits of Rights Issues

Investing in a company often feels like being part of an exclusive club where only current members get the chance to expand their influence. A rights issue is one such opportunity, providing existing shareholders the privilege to purchase additional shares before the company offers them to the public. This exclusive offer can be a strategic move by the company to raise capital while rewarding loyal shareholders.

In this chapter, we'll dissect rights issues, explore how they benefit shareholders, and delve into real-world examples from prominent Indian companies.

Understanding Rights Issues

A rights issue involves a company offering its existing shareholders the opportunity to buy additional shares at a discount before offering the new shares to the public. Shareholders receive rights that they can exercise to purchase the new shares, usually in proportion to their current holdings.

Why Do Companies Issue Rights?

Companies undertake rights issues for several reasons:

1) Raising Capital: Rights issues are a common way for companies to raise capital for expansion, debt reduction, or other financial needs without taking on additional debt.

2) Rewarding Loyalty: By offering shares at a discount, companies reward loyal shareholders, giving them a chance to increase their holdings at a favourable price.

3) Maintaining Control: Rights issues help prevent ownership dilution by allowing existing shareholders to maintain their proportional ownership in the company.

4) Signaling Growth: Undertaking a rights issue can signal to the market that the company has ambitious growth plans and needs capital to fuel those plans.

Let's see some real-life examples of Indian companies that have utilized rights issues effectively:

• Reliance Industries: In 2020, they launched India's biggest rights issue, raising over INR 53,000 crores. Shareholders got to buy additional shares at a discount, helping Reliance reduce debt and invest in future growth initiatives.
• Bharti Airtel: In 2019, Bharti Airtel used a rights issue to raise funds for network expansion and debt repayment. Shareholders were offered discounted shares, reflecting their focus on growth and financial stability.
• Tata Steel: Their 2018 rights issue aimed to raise capital for expansion and debt reduction. By offering shares at a discount, they provided existing shareholders with an attractive investment opportunity.

Impact of Rights Issues on Shareholders

While rights issues come with benefits, it's important to understand both sides of the coin:

1) Opportunity for Investment: Shareholders get the opportunity to purchase additional shares at a discounted price, which can be a profitable investment if the company performs well in the future.

2) Preserving Ownership: Rights issues allow shareholders to maintain their proportional ownership in the company, preventing dilution by new investors.

3) Short-term Price Fluctuations: The announcement of a rights issue can lead to short-term price adjustments. The stock price may drop initially due to the dilution effect but can recover as the market absorbs the company’s growth strategy.

4) Flexibility with Rights: Shareholders who do not wish to exercise their rights can often sell them in the market. This flexibility provides an additional financial benefit.

Case Study: Reliance Industries - A Rights Issue Success Story

Reliance Industries’ rights issue in 2020 was a landmark event in the Indian financial market. Offering shares at a discount, the company raised a substantial amount of capital, which helped reduce their debt and fund new ventures. This move not only reinforced investor confidence but also demonstrated Reliance’s commitment to growth and financial prudence. Shareholders who participated in the rights issue benefited from the attractive pricing and the company’s subsequent performance.

Conclusion

Rights issues are a strategic tool for companies to raise capital while rewarding their loyal shareholders. By offering shares at a discount, companies provide an attractive investment opportunity, allowing shareholders to increase their stake and support the company’s growth plans.

Next, we will explore another important corporate action: stock splits. We’ll uncover what stock splits are, how they affect shareholders, and their significance in the Indian market. Stay tuned!