Rights Issue

From Financial Literacy Wiki

Rights issue allows listed companies to raise additional equity funds. A rights issue gives existing shareholders the right to purchase new shares in proportion to their existing shareholdings at a specified price called the subscription price. The shareholder is free to either take up (or subscribe) for their rights or reject the offer within a specified time period. During the period, which is normally a few weeks, the rights are traded on the stock exchange ona "nil paid" bsis since the subscription price has not been paid yet.

It is common practice for companies to set up the subscription price below the prevailing price of the stock, so as to encourage shareholders to take up the rights. Thus rights have value in itself and that is why they could be traded on the stock market.