What will be the effect on issue of right shares? Why it is not issued in market directly? Will the shareholders be at any profit/loss? Let us move by defining it and the case onwards.
What is right issue of shares?
Right shares are simply the shares issued to the existing shareholders of the company at a discounted price by the company. It is called so because the existing shareholders have the “right” to buy it, sell it or ignore it. For e.g. – Say the market price of share is Rs. 1500, then the company will offer right shares at less than Rs. 1500 say Rs. 1000.
Why right shares are issued when they can be issued directly in market at the market price?
Problem raising funds from the market: If company faces any problem while raising funds from the market by issuing the shares.
Will there be any effect on the value of shares?
Here we can see that the price of share after issuing right shares will be Rs. 1417 as compared to price of Rs. 1500 before issue.
Will there be any effect on wealth of shareholders?
No, if the right is exercised but if it is not exercised then wealth will go down. Continuing with the example, assume that a shareholder F holds 2000 shares. Let us first find out the value of “right” which means what is the benefit which is given to the shareholders while issuing right shares. This can be calculated as:
Wealth remains at Rs. 30 Lakhs.
Net wealth after issue = (28.34 + 1.66) = 30 Lakhs.
Net Loss = 1.66 Lakhs.
Is there any risk when a company is issuing right shares?
Unable to float shares in market – Company may be out of funds to pay even for the floatation cost. There may be a lack of demand of its share in the market so there is a risk of under subscription for the company. It also questions the company’s ability to perform in the market.
If shares are sold before the announcement, will it be at risk to new shareholders?