A Rights Issue is a method through which companies can raise additional capital from their existing shareholders. Normally these stocks are offered at a discounted price than the existing market price. The Right Issue is attractive because the existing shareholder gets profit probably at the outset itself. It would be a Win-Win situation for both the company and the existing shareholder. However, it is not compulsory for the existing shareholder to take up this offer. The Rights issue helps the company to raise additional funds without the burden of debt. In fact, when an existing debt is paid out from out of the Rights Issue, that reflects well on the overall financial health of the company. However, there is a risk that the number of shares increasing can lead to a higher profit spread. That in turn reduces the EPS and has a negative impact on all the other ratios. Moreover, the Rights Issue can also send a signal among the public that the Company is in a financial crunch thereby reducing investor confidence. The Rights issues are given to shareholders in proportion to the number of shares already held by them. However, these stocks should be in the shareholder’s possession before the record date and ex-date. The recent companies that came out with Rights Issue are Reliance and Bharti Airtel (They are examples only and this is not a stock recommendation).
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