What are Rights Issues and Placings? (2024)

FAQs

What is a rights issue explained? ›

What is a rights issue? A rights issue is when a company offers its existing shareholders the chance to buy additional shares for a reduced price. Usually the discounted price will stand for a specified time frame, after which it is returned to normal.

An open offer - this is also known as a pre-emptive placing or placing subject to clawback and gives all shareholders a guaranteed right to participate. It differs from a rights issue in that there is no option to sell your entitlement in the market. The options are simply 1) take up the offer or 2) let it lapse.

A share placing (or placement) is when new equity shares are issued to individual investors, corporate entities, or small groups of investors for capital. This increases the amount of shares in issue and dilutes existing shareholders. Share placings usually go to institutions to fund company growth.

Rights issues can also be a risk, as current shareholders may not want to buy any more shares in the company if it's experiencing slower growth. The market may interpret a rights issue as a warning sign that a company is struggling.

Example of a Rights Issue

Let's say an investor owns 100 shares of Arcelor Mittal and the shares are trading at $10 each. The company announces a rights issue in the ratio of 2 for 5, i.e., each investor holding 5 shares will be eligible to buy 2 new shares.

If you decide not to take up the rights your overall shareholding in the company will be diluted. You can usually sell your rights in the market to compensate for any loss of value. If you don't sell your rights they will lapse and you may receive lapsed proceeds.

The RE shares will get lapsed if you do not apply for the rights issue and your Demat account credited with these temporary shares will get debited once the allocation process is complete. If the RE has been purchased, you will also lose the amount paid to acquire those REs.

Yes, shareholders can sell their rights issue. They can trade/sell them on the secondary market platform of the Stock exchanges through a registered stockbroker in the same manner as trading/selling equity shares of the company.

In a public offering, newly issued shares are sold to the general public. In a rights issue, existing shareholders are granted pre-emptive rights to purchase the newly issued shares of the listed firm. In a private placement, new shares are sold to institutions and/or high net worth individuals.

The main advantage of the rights issue is that It gives existing shareholders the exclusive right to purchase additional shares at a predetermined price. However, potential disadvantages include dilution of ownership for non-participating shareholders and market distrust, which could lead to a decrease in stock value.

What is the difference between right issue and private placement? ›

In case of Rights issue, the Company proposes to issue its shares to existing shareholders on a pro rata basis. In contrast to the private placement process, there are no limitations on using funds before filing the return of allotment in the case of a rights issue.

A placement is the sale of securities to a small number of private investors that is exempt from registration with the Securities and Exchange Commission under Regulation D, as are fixed annuities.  This exemption makes a placement a less expensive way for a company to raise capital compared with a public offering.

The rights issued to a shareholder have value, thus compensating current shareholders for the future dilution of their existing shares' value. Dilution occurs because a rights offering spreads a company's net profit over a larger number of shares. In turn, the company's earnings per share, or EPS, decreases.

Rights issues are an offer by a company to its shareholders to buy more of their stocks at a specific price by a stipulated deadline. To attract interest, these are usually at discounted rates to the normal share price.

The existing shareholders and renouncees can apply for the rights issue. The rights are offered to the existing shareholders who are on the records of the company as on a cut-off date known as a record date fixed by the company.

Risks: Shareholders face the risk of share dilution if they choose not to participate, and there may be short-term stock price volatility. How does a Rights Issue affect the stock price? A Rights Issue can lead to short-term volatility due to potential earnings per share dilution.

The shareholders not willing to subscribe to their rights issue can sell their rights in the open market through the rights entitlement trading platform of the stock exchange or via off-market transaction. This is known as the renunciation of rights shares.

The right issue is the way by which a company raises additional capital from its current shareholders. Unlike future or options, the value of share warrants is derived from underlying assets. Share Warrants help to diversify the portfolio as it is a cost-effective way of raising money.