{"id":29515,"date":"2021-04-30T14:53:01","date_gmt":"2021-04-30T09:23:01","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=29515"},"modified":"2021-04-30T14:53:03","modified_gmt":"2021-04-30T09:23:03","slug":"potential-benefits-and-downsides-of-the-right-issue-of-shares","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/potential-benefits-and-downsides-of-the-right-issue-of-shares\/","title":{"rendered":"Potential Benefits and Downsides of Right Issue of Shares"},"content":{"rendered":"\n<p class=\"has-drop-cap\">The right issue of shares is a\nmethod to procure funding of the companies listed on the stock exchange. When a\ncompany goes through a bad economic patch, it intimates the existing\nshareholders for additional funding for an issue of shares at discounted\nprices. Therefore, such a case is regarded as the right issue.<\/p>\n\n\n\n<p>An organization provides shares\nat a discounted price lower than its market value during the right issue\nprocess. Right issues of shares come in handy when it comes to&nbsp;overcoming\nthe financially stressed situation of the company. In this write-up, we will\nfocus on&nbsp;certain advantages and&nbsp;downsides of the right issue.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/potential-benefits-and-downsides-of-the-right-issue-of-shares\/#What_is_meaning_of_Right_Issue_of_Shares\" >What\nis meaning of Right Issue of Shares?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/potential-benefits-and-downsides-of-the-right-issue-of-shares\/#Understanding_the_Concept_of_Right_Issue_under_Companies_Act_2013\" >Understanding\nthe Concept of Right Issue under Companies Act, 2013<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/potential-benefits-and-downsides-of-the-right-issue-of-shares\/#What_are_the_Key_Features_of_a_Right_Issue_of_Shares\" >What\nare the Key Features of a Right Issue of Shares?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/potential-benefits-and-downsides-of-the-right-issue-of-shares\/#What_are_the_Considerable_Advantages_of_Right_Issue_of_Shares\" >What\nare the Considerable Advantages of Right Issue of Shares?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/corpbiz.io\/learning\/potential-benefits-and-downsides-of-the-right-issue-of-shares\/#Few_Drawbacks\" >Few\nDrawbacks<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/corpbiz.io\/learning\/potential-benefits-and-downsides-of-the-right-issue-of-shares\/#Conclusion\" >Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_meaning_of_Right_Issue_of_Shares\"><\/span>What\nis meaning of Right Issue of Shares?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A right issue is referred to as\nan offer to shareholders to acquire additional shares of the organization at a\ndiscounted price. The right issue is done in accordance with the existing\nholdings &amp; is needed to be subscribed within a particular period. The right\nwill lapse if the company fails to comply with the said timeline.<\/p>\n\n\n\n<ul><li>The rights issue refers to a primary market issue.&nbsp;<\/li><li>The offer is accessible to the existing shareholders &amp; not to the public in general.<\/li><li>It is the shareholder\u2019s right and not accountability to purchase the additional shares.<\/li><li>The rights can be sold or transferred if the existing shareholder is not willing to choose the offer.<\/li><\/ul>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/complete-procedure-for-right-issue-of-shares\/\">Right Issue of Shares: Step by Step Procedure<\/a><\/mark><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Understanding_the_Concept_of_Right_Issue_under_Companies_Act_2013\"><\/span>Understanding\nthe Concept of Right Issue under Companies Act, 2013 <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul><li>&#8216;Rights Issue&#8217; implies offering shares to shareholders of the company in proportion to their existing shareholding. The idea is to procure the additional funds.&nbsp;<\/li><li>Right issue is practiced by the small firms where the shareholding&#8217;s power retains with the company&#8217;s shareholders.<\/li><li>It is also known as&nbsp;<strong>&#8220;<\/strong><em><strong>pre-emptive right&#8221; <\/strong><\/em>that shareholder has in the organization inpreference to an outsider.<\/li><li>Any organization can opt for the right issue irrespective of its business structure.&nbsp;<\/li><li>The right issue allows the shareholders to purchase the new shares at a reduced price as that of the market price.&nbsp;<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_the_Key_Features_of_a_Right_Issue_of_Shares\"><\/span>What\nare the Key Features of a Right Issue of Shares? <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em><strong>These are some inevitable attributes of the right issue of shares:&nbsp;<\/strong><\/em><\/p>\n\n\n\n<ul><li>It allows the shareholders to trade with interested buyers\nuntil a specified date on which new shares are available for purchase. The\nright issue of trade is more or less identical to equity shares trade.&nbsp;<\/li><li>An organization during the right issue of shares renders\nsome preferential freedom to its shareholders. Thereby the shareholders access\nthe right to buy additional shares at a nominal price prior specified date.&nbsp;<\/li><li>In the right issue of shares, the number of shares buyout by\nexisting shareholders is always in accordance with the existing\nshareholding.&nbsp;<\/li><li>Furthermore, the existing shareholders also get the right to\ndismiss the right issue. Also, if shareholders disregard the option of buying\nadditional shares, the existing shareholding would get diluted after the release\nof the additional shares.<\/li><li>An organization can start the right issues only in a\ndemanding situation without incurring underwriting fees.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_the_Considerable_Advantages_of_Right_Issue_of_Shares\"><\/span>What\nare the Considerable Advantages of Right Issue of Shares? <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The right issue creates a winning proposition for both the organization and its shareholders. As the organization gets their hands to require funding and the shareholders possess the right to purchase at discounted prices corresponding to existing holding in the company. Have a look at the bright sides of using the right issue in comparison to the other modes of Fundraising:-<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" width=\"743\" height=\"397\" src=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/04\/What-are-the-Considerable-Advantages-of-Right-Issue-of-Shares.png\" alt=\"What are the Considerable Advantages of Right Issue of Shares\" class=\"wp-image-29557\" srcset=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/04\/What-are-the-Considerable-Advantages-of-Right-Issue-of-Shares.png 743w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/04\/What-are-the-Considerable-Advantages-of-Right-Issue-of-Shares-300x160.png 300w\" sizes=\"(max-width: 743px) 100vw, 743px\" \/><\/figure><\/div>\n\n\n\n<h3 class=\"wp-block-heading\">A\nSwift Way to Raise Capital<\/h3>\n\n\n\n<p>Unlike public offerings, the\nright issue entails less complicated rules as it is more of internal affairs.\nThe only protocol that prevails is that the listed organizations file a letter\nof offer with SEBI &amp; stock exchanges for public feedback to get approval\nbefore issuing new shares.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Rise\nof Promoter Shareholding<\/h3>\n\n\n\n<p>Another significant advantage\nis that the right issue lets promoters raise their shareholding. The\nshareholders are eligible to subscribe to an unsubscribed portion\u2019 of the issue,\nincreasing the shareholding.<\/p>\n\n\n\n<p>There is no denying that a\nright issue is arguably the most secure method for Fundraising. It offers an\nopportunity for the company to expand its portfolio without any simultaneous\nincrease in debt. With the right issue, an organization can procure additional\nfunding from its existing shareholders by altering the terms of member\u2019s\nholding. Therefore, it mitigates the scope of the debt.&nbsp;<\/p>\n\n\n\n<p>Record date refers to a date on\nwhich shareholders can purchase the additional shares. The company finalizes\nthis date by taking the shareholder\u2019s permission into account.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Few_Drawbacks\"><\/span>Few\nDrawbacks<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Although the right issue is\narguably the best source to procure the additional funding, yet oftentimes the\ncompanies have to confront some downsides of it. Here are the most general\ndownsides of the right issue.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">The\nSize of Fundraising is Limited<\/h3>\n\n\n\n<p>The obvious downside is that an\norganization cannot procure an amount in case of an IPO. The stock exchanges do\nnot allow the company to raise funds via the right issue to the full potential.\nAlso, such a limitation is proportional to the company existing equity value. <\/p>\n\n\n\n<p>The right issue is generally\nachieved by undervaluing the stocks so that shareholders can purchase them with\nease. This might be a good option in case of sudden financial need, but it\nmight create pressure on the company in the long-term.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Value\nof Share Eroded<\/h3>\n\n\n\n<p>At the time of equity share, the stake dilution of existing shareholders is very much on the card. As the percentage shareholding gets minimized on the advent of new <strong><em>shareholders<\/em><\/strong><sup><a href=\"https:\/\/en.wikipedia.org\/wiki\/Shareholder\"><strong><em>[1]<\/em><\/strong><\/a><\/sup>, it can push the existing shareholders towards a stressful situation.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Despite having several pros and downsides, one must admit that the right issue is the most secure method for procuring additional funds. However, such a fundraising method is subjected to certain rules and regulations that the company must follow. Share your concern with us in case you have any doubt regarding this topic i.e. pros and downsides of right issue.&nbsp;<\/p>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/issue-of-shares-on-preferential-basis\/\">Issue of shares on Preferential Basis: A Complete Procedure<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The right issue of shares is a method to procure funding of the companies listed on the stock exchange. When a company goes through a bad economic patch, it intimates the existing shareholders for additional funding for an issue of shares at discounted prices. Therefore, such a case is regarded as the right issue. An [&hellip;]<\/p>\n","protected":false},"author":22,"featured_media":29556,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[120],"tags":[400],"acf":{"service_id":"408"},"authorName":"Pankaj Tyagi","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2022\/01\/MicrosoftTeams-image-42.jpg","authorDescription":"Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.","postViews":4239,"readingTime":4,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/29515"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/22"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=29515"}],"version-history":[{"count":13,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/29515\/revisions"}],"predecessor-version":[{"id":29558,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/29515\/revisions\/29558"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/29556"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=29515"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=29515"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=29515"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}