A rights issue is one of the ways through which companies raise equity capital without the conditions usually tied to debt capital.
Rights issues provide existing shareholders with an opportunity to purchase additional new shares from the company.
Companies often find themselves in need of additional capital to fund expansion into new markets, adoption of new technologies, investment in research, debt repayment, fund working capital, acquisitions or even to implement a turnaround strategy.
While in many cases companies use profits or retained earnings from ongoing operations to fund such activities, at times companies go for external sources for more than one reason.
This is usually in the form of debt or equity capital. The former refers to bank loans or corporate bonds.
When seeking to boost their capital through borrowing, companies usually have to bear in mind that the principal amount and interest must be paid to lenders within a specified period, failure to which can lead to liquidation of the company by the lenders.
Equity capital on the other hand refers to funds raised by either sale of shares by existing owners or issue of new shares by the companies seeking additional equity.
A rights issue is one of the ways through which companies raise equity capital without the conditions usually tied to debt capital.
Rights issues provide existing shareholders with an opportunity to purchase additional new shares from the company.
This type of issue gives existing shareholders the right to purchase additional shares at a prescribed price on a stated future date. The additional shares are usually sold by the company at a discount to the market price.
Legally, a rights issue must first be offered to existing shareholders before being opened to non-shareholders.This is because existing shareholders have the “right of first refusal” otherwise known as “preemptive rights” on the new shares.By taking these preemptive rights up, existing shareholders can maintain their existing percentage holding in the company.While the rights issue approach is mostly taken by companies seeking additional capital to meet future financial obligations, not all companies that pursue a rights offering are in financial trouble.From the Kenyan experience, most companies opt for this route as a way of reducing their debt to equity ratio which then makes it easier for them to regularise debt and access new working capital facilities to fund their expansion or turnaround strategies.This in many cases results in capital gains for the investors in the long run.For ins […]
