Right Issue Explained Stock purchase right is also known as a right issue. It is an exclusive right given to the existing shareholders to buy the fresh shares that a company is issuing in the market. According to this right, whenever a company issues fresh shares, they are first offered to the existing shareholders than to the general public.
However, the number of shares that the existing shareholders can buy is determined by the company’s ownership held by the shareholders.
By issuing fresh equity shares to the existing shareholders, a company gets in a Win-Win situation because the existing shareholders get their rights and ownership retained, and the company gets its required capital for its projects. However, it dilutes the earnings per share and also the book value of the share. Market prices of shares also get adjusted when the books for the year are closed after the issuance of shares.
The fresh shares are issued to the existing shareholders at a discounted rate, which is beneficial. They also do not need to go to the secondary market to buy the shares they get directly from the company they have invested in.
Reasons that force Companies to Right Issue
There is a multitude of reasons that forces a company to the right issue. Some of them are explained below:
Whenever a company plans to expand, it needs capital, and one of the methods of obtaining capital is the right issue. Due to the correct issue company gets in a Win-Win situation because it is beneficial for both the existing shareholders and the company. It serves the purposes of the existing shareholders and the company well.
Whenever debt funding or loan funding is not available, feasible, or expensive, the company utilizes the method of right issue.
The method of the right issue is also utilized when a company is looking to improve its debt-to-equity ratio. It is also utilized when a company is trying to buy a new firm.
Some troubled forms can also try tissue to pay off their debts. In this way, they do not fall into a debt trap.
Characteristics of the Right Issue Offers
There are numerous characteristics that the right issue offers. Some of them are mentioned below:
A company right issues when it needs funds to fund its projects or when it wants to expand its business.
The right issue gives preferential treatment to the existing shareholders. Existing shareholders are given the right to buy fresh shares at discounted rates whenever they are issued.
The right can be traded with the other interested parties if a right holder wants to. Right issues are traded similar to the normal shares in the stock market.
The number of shares that existing shareholders can buy is an indirect promotion to his ownership of a fraction of the company.
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