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Understanding Rights Issues in Corporate Finance

A rights issue allows existing shareholders to purchase additional shares at a discounted price, proportional to their current holdings, as a means for companies to raise capital. According to Section 62(1) of the Companies Act, 2013, these shares must be offered to existing shareholders to maintain equitable distribution and voting rights. Pre-emption rights give shareholders the first opportunity to buy shares before they are offered to others, helping to maintain the existing shareholder base.

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8 views8 pages

Understanding Rights Issues in Corporate Finance

A rights issue allows existing shareholders to purchase additional shares at a discounted price, proportional to their current holdings, as a means for companies to raise capital. According to Section 62(1) of the Companies Act, 2013, these shares must be offered to existing shareholders to maintain equitable distribution and voting rights. Pre-emption rights give shareholders the first opportunity to buy shares before they are offered to others, helping to maintain the existing shareholder base.

Uploaded by

dasssah29
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

Corporate Accounting

Rights Issue of Shares


Meaning
A rights issue is an offering of rights to the existing shareholders of a
company that gives them an opportunity to buy additional shares
directly from the company at a discounted price rather than buying
them in the secondary market. The number of additional shares that
can be bought depends on the existing holdings of the share owners.
Meaning
These rights are normally distributed in the form of a dividend and the
number of additional shares that can be purchased by the shareholders
is usually in proportion to their existing shareholding. Rights may be
fully or partially exercised by the holder.
Companies undertake a rights issue when they need cash for various
objectives. The process may allow the company to raise money without
necessarily incurring underwriting fees, although some rights issuances
may be underwritten if the company wants to ensure the amount of
capital raised.
Statutory Provision

As per Section 62(1) of the Companies act, 2013 if the Company


decides to issue fresh shares, these should be offered to existing
shareholders in proportion to existing persons who are holders of
equity shares.
‘Right Issue’ means offering shares to existing members in proportion
to their existing share holding. The object is, of course, to ensure
equitable distribution of Shares and the proportion of voting rights is
not affected by issue of Fresh shares.
Example
• Let’s say an investor owns 100 shares of Arcelor Mittal and the shares
are trading at $10 each. The company announces a rights issue in the
ratio of 2 for 5, i.e., each investor holding 5 shares will be eligible to
buy 2 new shares. The company announces a discounted price of, for
example, $6 per share. It means that for every 5 shares (at $10 each)
held by an existing shareholder, the company will offer 2 shares at a
discounted price of $6.
Pre-emption
• Pre-emption rights give existing shareholders first refusal to buy
another shareholder’s shares or first offer on an issue of new shares
by a company, in each case, before they may be offered [Link]
terms of the pre-emption rights on the transfer of shares, their
primary function is to help maintain the existing shareholder base and
limit the ability for an unknown third-party shareholder to become
involved in the company.
Journal Entries
Debit/Retained Earnings (or Share Premium Account, if applicable)
Credit/Share Capital (to reflect the authorization of additional shares)

When shareholders exercise their rights


Debit/Cash (for the amount received)
Credit/Share Capital (for the par value of shares issued) and Share Premium
(for any amount received in excess of par value)

When the right issue is fully subscribed


Debit /Bank (or Cash)
Credit/Share Capital and Share Premium.
Chisomo Kharis Mtonga
Registration Number
21313551014

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