rights issue

Topics: Stock market, Stock, Shareholder Pages: 2 (406 words) Published: September 23, 2013
2.

RIGHTS ISSUE:

A rights issue is an issue of rights to buy additional securities of a company`s existing security holders. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the firm at a specified price within a specified time. Rights of issue are an invitation to the existing shareholder in the market to purchase additional shares of the company at a lower price. The shareholders receive certain rights as they are already the existing shareholder in the company. These rights are non-charged to the holder. It is on the shareholder to further increase their shareholding in the company by using the given rights or if they choose not to increase their holding they won’t exercise the rights. Incase if a shareholder decides to exercise his rights it means that the shareholder will buy more shares in the company but at the reduced price and with no brokerage fees. So, for example if FameRay shares trading at R30 per share but the existing shareholder who is awarded the rights to buy more FameRayshares at the reduced price of R27, the shareholder will, upon exercising his or her rights, have to pay R27 for the additional share.

WHY DO INVESTORS USE RIGHTS ISSUE:

As these rights are given only to the existing shareholders of the company naturally are for the benefits of the shareholder and thus they are more demanded by the shareholders. These shares are usually priced at a big discount than the current trading price to encourage investors to take up the offer as the new shares are also free of stamp duty and broker commission. Shareholders in companies conducting rights issues have three options. They can take up the offer, sell their rights, or take up a halfway position, known as "tail swallowing".

Shareholders can have rights of 3 options:

1. Exercise the rights – the shareholder must give notice that he or she intends to exercise the rights. In this case, the shareholder...
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