What Is Rights Issue of Shares? Know the Advantages & Disadvantages

Last updated on July 8, 2020

Capital is the foundation of any company. When a company undergoes liquidity crises, the chances of failure are higher. Borrowing money could be the only solution in such a situation. However, availing debt-free funds are also necessary for a safer future of the company. For this, a company can use its existing shareholders by offering them the opportunity to subscribe to further shares. This mode of raising finance is called Right Issues of shares.

The concept of Right Issues of shares

When a company needs additional funds, a Right Issue of Shares can make for a good resort for fulfilling their requirements. It is a way through which a listed company in the stock exchange can raise capital for their needs. Unlike other funding options, Right Issue of Shares can be a more feasible option as the company can raise funds from its existing shareholders. Furthermore, the new shares issued here are not offered to the public, but for the current shareholders. The shareholders can subscribe to the shares compatible with their existing holdings. The funds can be used for anything like company expansion, launching new products, clearing the debts or acquiring another company. Additionally, Right Issues for Shares is one of the finest ways to raise funds without incurring additional debts. However, the listed companies must file a letter of offer with SEBI and stock exchanges before issuing new shares.

Right Issues of shares – Pros and Cons

Every fundraising option has its ebbs and flows. The companies can avail benefits using Right Issues of Shares in various ways.

• Right Issues of Shares offers a faster method of raising capital for the companies. Its rules and regulations are comparatively less rigorous as it is as more of an internal matter.
• It helps the promoters to elevate their shareholdings. For this, the shareholders must subscribe for an ‘unsubscribed portion’ of the issue.
• Usually, companies announce a record date to put a figure on the shareholders eligible to participate in the rights issue. This can further help companies to issue rights and raise the required capital.

The Right Issues of Shares is undoubtedly a reliable source to avail funds. However, sometimes it has its limitations. Some of the common limitations include:

• Companies may not be able to raise more funds using Right Issues of Shares. Mostly, the restriction is put down by stock exchanges, and that limit will be proportional to the company’s current equity value.
• When there is an increased number of shares, the cost of each share may get diluted. This can get the existing shareholders to trouble.
• Issuing the Right shares can diminish the reputation of the company. When a company issue right shares; it indicates the liquidity crises of the company.

Though the Right Issues of Shares is highly beneficial for the companies, they must conduct a complete research before making up their mind. Compare the advantages and disadvantages and ensure that the investments can be useful for the betterment of the company.  A company can also manage its working capital requirements effectively by investing in mutual funds, provided the company has a mandate that allows for such investments. Moreover, most of the companies prefer mutual funds now, owing to better returns and diversification.