What Is a Rights Issue?

A rights issue is an invitation to existing shareholders of a company to buy additional shares in proportion to their current shareholding at a specified period at a discount to the market price. Companies have rights issues when they want to raise more money to fund acquisitions or growth strategies and in some cases to also pay off debt especially when they are unable to borrow more money.

A shareholder has three options during a rights issue:

1. Subscribe to the rights issue in full – accept offer to buy additional shares in proportion with current shareholding and thus increase number of shares held.
2. Ignore the rights issue – the shareholder does not subscribe therefore remains with the same number of shares
3. Sell your rights to another investor – some rights are not transferable but if they are, the shareholder can sell them privately or in the open market to other investors.

Shareholders should be cautious before deciding whether to accept or reject the rights issue and should always find out reasons for the rights issue and the risks and benefit of gaining more shares.

Example

In 2015, Housing Finance had a rights issue where they issued 116,666,667 new shares at the price of KES 30 per share and the ratio 1 new share for every 2 ordinary shares held. At the time of the rights issue announcement, the market price of Housing Finance shares was KES 48; this was a 37.5% discount. The rights issue was expected to raise KES 3.5 Billion. The rights issue began on 19th February and closed on 13th March. Housing Finance said that the reason for its rights issue was to expand its lending capacity.