What is a rights issue?
In a rights issue – also called a rights offering – a company gives it shareholders the chance to buy additional shares, proportionate to the amount they already hold, and usually at a discounted rate compared to the current market price. The shareholders have a fixed time period to decide whether they want to 'take up their rights'.
Where have you heard about rights issues?
In 2013 Barclays Bank made the headlines after a £5.8 billion rights issue. The shares were issued at a heavily discounted price to raise funds to meet regulatory targets set by the Bank of England that required all UK banks to hold shareholder equity equal to at least 3% of its total assets.
What you need to know about rights issues.
Companies usually use rights issues to increase cash flow. Often this is to pay existing liabilities if they are unable to increase their lending, although sometimes it could be part of an expansion strategy or even to fund an acquisition.
The anticipation of a rights offering can often undermine a company's share price, as the assumption is usually that the company is struggling financially. However, if the rights issue allows the company to get on a more stable financial footing, or invest in a new direction or company that increases its profit margins, shareholders who 'take up their rights' could make a profit on their discounted shares.
Shareholders have three options available to them when rights are issued:
- Exercise their rights to purchase the additional shares
- Ignore the rights issue
- Sell their rights to other investors or an underwriter. In some cases it is not possible to sell rights, but when it is possible the investor needs to understand how much they could gain by selling the rights.
Find out more about rights issues.
Rights issues are similar to initial public offerings (IPOs), but are designed exclusively for existing investors. For more information, see IPO.