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Rights Issue Advantages and Disadvantages – Is Rights Issue Good or Bad in 2022?

Rights Issue Advantages and Disadvantages - Is Rights Issue Good or Bad?

Rights Issue Advantages and Disadvantages

Generally, companies have a variety of ways to raise equities, and rights offerings or issues are one of them.
When a company issues a rights offering it raises new funds.
If you are looking for a rights issue of shares you need an understanding of rights issues. It gives shareholders an opportunity to raise their exposure to the stock at a discounted price.
Only shareholders on a given record date, will have the right to buy rights shares. Subscribing to a rights issue of share offer is just like investing in a stock. Let us have a note of the rights issue advantages and disadvantages.

Also Read What is a Rights Issue of Shares? | Rights and Bonus Issue | Example | Eligibility | Types

Rights Issue Advantages

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For the company

  • Rights offering or rights issue (RI) can produce an advantage to the company by allowing them to raise capital. If a company is struggling financially, this kind of move could assist them to boost its balance sheet by eliminating debt or injecting new cash flow into the business.
    This issue can also raise market interest in the company, resulting in new investors buying and potentially driving the share price up.
  • The rights issue over a loan is that company doesn’t have to pay the funds back. A loan must be repaid, and the financial institution wants interest on top of the repayments. When the company issues rights share to an investor, it’s a different setup. Instead of the regular repayments of a loan, you get an injection of cash you can purely use to build up the business.
  • This issue is a cost-effective event as the companies do not have to pay for advertisements and underwriters.
    Offering extra shares at a discount support a company to retain its extant investor’s confidence.

Also Read How to Apply for Rights Issue Online? – Bank or Demat a/c or RTA Website

For the Shareholder

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  • The allotment method of the rights issue is systematic and depends on the present holding of existing shareholders.
  • The advantage of a rights issue to shareholders is that shares are generally offered at a discounted price.
    this discount can be quite steep in some conditions. However, it all depends on how much the company feels it needs to encourage its shareholders to purchase the rights issue.
  • Whether you are able to realize a significant gain depends on the market price and the discounted price.
    You also have to factor in the number of rights you’d be able to transfer. Normally, the amount of shares an investor can buy via a rights offering is proportionate to the number of shares they currently own.

Rights Issue Disadvantages

  • The company may be unable to raise more money and fail to achieve its target. This may happen if the existing shareholders of the company are not too keen to invest more.
  • Rights issues can have a significant impact on share prices and trading activity in a firm’s security on the day of the announcement.
    1. Value of each share may get diluted after the RI announcement.
    2. Raising funds via the right issue often creates pressure on the issuer.
    3. Investor(s) may lose the holding value if the share price come down after the RI.

Being a shareholder, you should be able to see beyond the discount offered. A rights issue is different from a bonus issue, as here you have to pay funds to get additional shares.
Therefore, it is advised that you should subscribe to it only if you are very much sure about the company’s future performance.

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