Right Issue

Imagine you're part of a club, and the club needs money to improve its facilities (like buying new equipment or fixing the clubhouse). The club decides to raise money by offering you, the existing members, a chance to buy more shares (ownership) in the club at a cheaper price than what new members would pay. This is a Rights Issue.

Think of it like this:

• The Club: A company.
• Club Members: Shareholders (people who own shares in the company).
• Need for Improvement: The company needs money (capital) for expansion, paying off debt, or other reasons.
• Offering New Shares: The company is giving existing shareholders the right to buy more shares.
• Discounted Price: The new shares are offered to existing shareholders at a lower price than what they're currently trading for on the stock market.

Key Things to Know:

• Right, Not Obligation: You don't have to buy the new shares. It's your right to do so.
• Proportional to Ownership: The number of new shares you can buy is usually based on how many shares you already own. For example, the company might offer "1 new share for every 5 shares you own."
• Discounted Price: This is the biggest incentive. You're getting shares cheaper than anyone else can.
• You Have Options:
  • Buy the new shares: You invest more money and own a larger percentage of the company.
  • Sell your "rights": If you don't want to buy the new shares, you can sell your right to someone else who does. These rights are traded on the stock market just like regular shares.
  • Do nothing: You ignore the rights issue. This means you miss out on the discounted price.

Why Do Companies Do Rights Issues?

• Raise Money: It's a way for the company to get cash quickly without taking out loans.
• Avoid Debt: Raising money through shares avoids having to pay interest on loans.
• Improve Financial Health: The company might need the money to pay down debt or become more financially stable.
• Fund Expansion: Companies use right issues to raise capital for new projects, acquisitions, or expansion plans.

What Happens if I Don't Participate?

If you don't buy the new shares or sell your rights, your percentage ownership of the company will be diluted (reduced). Imagine the pie (company ownership) stays the same size, but it's cut into more slices (more shares). Your existing slices represent a smaller percentage of the whole pie.

Example (Simplified):

You own 100 shares of a company. The company offers a rights issue of 1 new share for every 5 shares owned, at a price of $5 per share. The current market price is $10 per share.

• You're eligible to buy 20 new shares (100 shares / 5 = 20 shares).
• Buying those shares will cost you $100 (20 shares x $5).
• You now have 120 shares (100 + 20).

Important Considerations:

• Why is the company raising money? Is it a good reason (expansion) or a bad one (desperation)?
• What will the company do with the money? How will it benefit the shareholders?
• Will the share price be affected? The market often reacts negatively to rights issues because it increases the number of shares outstanding, which can dilute earnings per share.

In summary, a rights issue is a way for companies to raise capital by offering existing shareholders the opportunity to buy more shares at a discount, giving them a privilege that new investors don't have.

2. Promoter's Contribution in a Rights Issue

In a rights issue, a promoter (think of them as the founders or major stakeholders who actively manage and control the company) also has the opportunity, and sometimes an obligation, to participate. Their participation, or lack thereof, sends a strong signal to the market about their confidence in the company's future.

Why is Promoter Contribution Important?

• Signal of Confidence: If promoters participate fully in the rights issue, it shows they believe in the company's prospects and are willing to invest further. This can reassure other investors.
• Avoiding Dilution of Control: If promoters don't participate, their ownership stake will be diluted, potentially weakening their control over the company. In some cases, promoters might need to maintain a certain level of ownership for strategic reasons.
• Regulatory Requirements: In some jurisdictions, especially in India (which is a common context for discussing promoter contributions), regulations require promoters to subscribe to a minimum portion of the rights issue to demonstrate their commitment. SEBI (Securities and Exchange Board of India) guidelines often address this.

How Does it Work?

1. Promoter is also a Shareholder: Promoters are, by definition, large shareholders in the company. Therefore, they receive the same "rights" as any other shareholder in the rights issue.
2. They Have the Same Options: Like any other shareholder, promoters can:
   • Subscribe Fully: Buy all the new shares they are entitled to.
   • Partially Subscribe: Buy some, but not all, of the new shares.
   • Renounce their Rights: Sell their rights to someone else.
   • Let the Rights Lapse: Do nothing, and their rights expire. (Often seen as a negative signal)
3. Minimum Subscription Requirements: Regulations might mandate a minimum subscription level for promoters. If they don't meet this level through their own subscriptions, they may need to find others (like underwriters) to subscribe on their behalf.
4. Disclosure: Promoters' participation or non-participation is always disclosed publicly. This is a material fact that investors need to consider.

What If Promoters Don't Contribute?

• Negative Signal: The market may interpret this as a lack of faith in the company's future. The share price could decline.
• Loss of Control: The promoters' ownership percentage will decrease, potentially affecting their ability to make decisions for the company.
• Regulatory Scrutiny: If there are minimum subscription requirements, regulators may investigate why the promoters didn't participate and whether any rules were violated.

3. Minimum Subscription in a Rights Issue

Think of a rights issue as a fundraising campaign for a company. The company wants to raise a specific amount of money by offering new shares to its existing shareholders. But what happens if not enough shareholders participate? That's where "minimum subscription" comes in.

What is Minimum Subscription?

Minimum subscription is the least amount of money the company must raise through the rights issue for it to be considered successful and for the company to actually proceed with issuing the new shares. It's like having a fundraising goal - if you don't reach a certain level, you can't go ahead with your project.

Why is it Important?

• Viability of the Project: The company undertakes the rights issue because it needs money for a specific reason – expansion, debt repayment, etc. If it doesn't raise enough money (i.e., doesn't reach the minimum subscription), the project for which the funds were intended might not be viable.
• Investor Protection: It protects investors by ensuring that the company raises enough capital to actually use the funds effectively. If a company only raises a small fraction of what it needs, the rights issue might have been a waste of time and money, and the company's situation might even worsen.
• Regulatory Requirement: Regulatory bodies often mandate a minimum subscription level to prevent companies from launching rights issues that are unlikely to succeed.

How Does it Work?

1. Set by the Company: The company, in consultation with its advisors, decides on the minimum subscription amount. This amount is usually a significant percentage of the total funds the company aims to raise.
2. Specified in the Offer Document: The minimum subscription amount is clearly stated in the offer document (also known as the prospectus or letter of offer) that is sent to shareholders.
3. If Met: If the total subscription (the amount shareholders actually invest) equals or exceeds the minimum subscription, the rights issue proceeds as planned. The new shares are issued, and the company receives the funds.
4. If Not Met: If the total subscription falls short of the minimum subscription:
   • The Rights Issue Fails: The company cannot proceed with the rights issue.
   • Money is Returned: All the money that investors have already paid to subscribe for the shares is returned to them, usually without interest.

Example:

Let's say a company wants to raise $10 million through a rights issue. They set the minimum subscription at $7.5 million.

• Scenario 1: Success! Shareholders subscribe for a total of $8 million. The rights issue is successful because it exceeded the minimum subscription of $7.5 million.
• Scenario 2: Failure! Shareholders subscribe for a total of only $6 million. The rights issue fails because it did not reach the minimum subscription of $7.5 million. The company must return the $6 million to the investors.

Key Takeaways:

• Minimum subscription is a crucial safety net in a rights issue.
• It ensures the company raises enough funds to achieve its goals.
• It protects investors from investing in a rights issue that is likely to fail.
• Always check the offer document for the specified minimum subscription amount.

Why Should Investors Care?

Knowing about the minimum subscription helps investors assess the risk of the rights issue. If the minimum subscription is set very high relative to the company's market capitalization, it might indicate a greater risk that the rights issue will fail. Investors should consider this, along with other factors, before deciding whether to participate.