Rights Issue
A Rights Issue is a corporate capital-raising transaction in which a company offers existing shareholders the right to purchase additional new shares at a discount to the prevailing market price, in proportion to their current holdings, before offering any unsold shares to other investors.
Rights issues are one of the most common methods for publicly traded companies to raise secondary capital while respecting existing shareholders' proportional ownership interests. By offering new shares to current investors first — at a price below the market to make the offer economically attractive — the company gives shareholders the choice to maintain their percentage ownership (by exercising their rights) or to sell the rights to other investors who wish to participate.
The mechanics of a rights issue center on the subscription price and the rights ratio. A company might issue one new share for every five existing shares held (a 1-for-5 rights issue), at a 20% discount to the current market price. This discounted price is not a gift: it reflects the fact that the issuance of new shares dilutes the value of existing shares, and the subscription discount compensates for this dilution if the shareholder exercises. The theoretical ex-rights price (TERP) — the expected share price after the rights issue dilutes the share count — is the relevant comparison, not the pre-announcement price.
Shareholders who receive rights but choose not to exercise them have options depending on the structure. In a renounceable rights issue (the most common form in the US and globally), rights can be sold on the stock exchange during the subscription period. The sale proceeds compensate the non-exercising shareholder for the dilution they will experience, though they will no longer participate in the new shares. In a non-renounceable rights issue, unexercised rights simply lapse without value — a structure that puts pressure on shareholders to exercise and is viewed less favorably.
The underwriting of rights issues is handled by investment banks, which typically provide a 'standby' commitment to purchase any shares not taken up by shareholders. This backstop ensures the company receives the full targeted capital raise regardless of shareholder take-up rates. The underwriter's fee reflects the risk of being left holding unsold shares if the stock price falls below the subscription price during the offering period.
For investors, rights issues are an important corporate action requiring attention. Failing to act — neither selling nor exercising rights — typically results in dilution without compensation. Understanding the economics (effective subscription price relative to TERP, the use of proceeds, and the impact on per-share metrics) is essential to making an informed decision.