Rights Issue

At the time of carrying out a secondary market offering or secondary public offering of shares for the purpose of raising money, an institution has the option to make a rights issue for raising equity. Through the issued rights, the current stockholders get the special benefit of purchasing a particular number of fresh stocks from the company at a stipulated and lucrative price within a certain period of time. The rights issue is provided to every present stockholder on an individual basis and it can be either entirely accepted (in case of a common rights issue) or can be refused or can be partially accepted by every stockholder. Rights can be transferred frequently and this permits the stockholders in selling the rights in the open market.

Rights are non-renounceable (which means the stockholders have two options, either they have to occupy the rights or allow them lapse. When the rights are lapsed, they do not have any existence) or renounceable (which means rights may be sold distinctly from the stocks to other investors within the term period of the right).

For the purpose of issuing rights, the finance manager has to take into account the following factors:

Number of new stocks for sale
Subscription price every new stock
The result of rights on the value of the present stock
The value of rights
The result of rights to present and new stockholders

A right to a stock is commonly released based on a ratio, for example 1 for 3 rights issue. As the company is receiving the stockholder’s fund in substitution of issuance of rights, the rights issue functions as an origin of fund for the organization, which issues it.

Underwriting of rights issues can be done. The function of the underwriter is to ensure that the funding required by the institution would be collected. The contract between the organization and the underwriter is laid down in an official underwriting contract. The usual terms and conditions of an underwriting agreement necessitate the underwriter to obtain any stock that has been offered, however, not received by the stockholders. In normal terms, the underwriting contract would help the underwriter to cease its responsibilities in specified situations.
Successively, a sub-underwriter performs the sub-underwriting of a limited number of liabilities or the entire liabilities of the principal underwriter. The risk is transferred from the underwriter to the sub-underwriter in that the sub-underwriter has to buy or obtain a part of the stocks for which there is an obligation on the underwriter for subscribing them in the occurrence of a shortage or deficit. The sub-underwriters and underwriters can be stockbrokers, financial service providers, principal shareholders of the organization or other associated or non-associated entities. The advice of the panel encompasses both underwritten and non-underwritten rights issues.

More Information Related to Finance Theory
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Last Updated on : 1st July 2013