What is a rights issue?

A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. This type of issue gives existing shareholders securities called rights. With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date.

What is a 1 for 2 rights issue?

Firstly this is what’s known as a 1-for-2 rights issue – every two existing shares you own in ABC Plc lets you buy one new share. The ratio of new shares to old shares is decided by the company when the rights issue is announced, and is the same for all shareholders.

What are the disadvantages of a rights issue?

There are several disadvantages of a rights issue. Firstly, it is going to increase the number of shares in issue. This is dilutive and so will have an effect on future earnings per share of the company. However, existing shareholders can retain their percentage of equity by taking up their rights and buying new shares.

Why would a company offer a rights issue?

A company would offer a rights issue in order to raise capital. If current shareholders did choose to buy the additional shares, a company could use the funding to clear its debt obligations, acquire assets, or facilitate expansion without having to take out a loan from a bank.