Definition of Right Issues

Rights Issue Definition and Advantages

Rights Issue Definition

It is an invitation to the existing shareholders to subscribe for further shares to be issued by a company.

A right simply means an option to buy certain securities at certain price and within a time fix time period. The Company Act, 1956 lays down the manner in which further issue of shares, whether equity or preference, is to be made. This is to ensure equitable distribution of shares without disturbing the existing equilibrium of shareholding in the company.

According to Section 81 of the Companies Act, a public limited company can issue shares, after the expiry of two years from the formation of the company or the expiry of one year from the first allotment of shares in the company, whichever is earlier.

Procedure to Subscribe capital from market –

  1. Such shares must be offered to holders of equity shares in proportion, as nearly as circumstances admit, to the capital paid-up on those share.
  2. The offer must be made by giving a notice specifying the number of shares offered.
  3. The offer must be made to accept the shares within a period specified in the notice being not than 15 days.
  4. Unless the articles of association of the company provide otherwise, the notice must also state that the shareholder has the right to renounce all or any of the shares offered to him in favor of his nominees.

When company offers shares  to existing shareholders are called Right Shares. The existing equity shareholders of the public company have a first right over the allotment of further shares. The offer of such shares to the existing equity shareholder is known as Privileged Subscription or Rights Issue. The prior right of the shareholders is also known as pre-emptive right.

After expiry of the time mention in the notice or on receipt of earlier information from the shareholder declining to accept the shares offered, the Board of Directors may dispose them off in such a manner as they think most beneficial to the company.

Advantages of Rights Issue

  1. It ensures that the control of the company is remains with existing shareholders.
  2. The expenses to be incurred, otherwise if shares are offered to the public, are avoided
  3. There is more certainty of the subscription of the shares on part of existing shareholder.
  4. It betters the image of the company
  5. Stimulates enthusiastic response from shareholders and investment market.
  6. It ensures that the directors do not misuse the opportunity of issuing new shares to their relatives.