Rights issue
Also known as: Rights offering, Pre-emptive offering
Every shareholder is offered new shares in proportion. Nobody who takes part is diluted, which is why the discount can be enormous and cost nothing.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat actually happens?
A company that needs money can ask its existing owners for it. That is a rights issue. Every shareholder is offered new shares in proportion to what they already hold — one new share for every three held, say — at a price below the market price.
The discount looks alarming and it usually is not. If you own one per cent of the company before and you take up your rights, you own one per cent afterwards. You paid a low price and you own the same share of a company that now has more cash. Nothing has been taken from you.
The people who lose are the ones who do nothing. Their share of the company shrinks, and they did not get the cheap shares that would have kept it whole.
Which is why the right itself can be sold. A shareholder who cannot or does not want to put in more money can sell the right to somebody who does, and the money they receive compensates for the dilution. Doing nothing at all is the only genuinely bad option, and it is what a surprising number of small shareholders do.
- 1
Preparation4–10 wks
The size, the discount and the underwriting are agreed and a full prospectus is prepared.
- 2
Announcement1 day
The terms are published: how many new shares per held share, and at what price.
- 3
Shareholder approval2–4 wks
Where the issue exceeds the standing authority, a meeting approves it.
- 4
Rights trading2–3 wks
The rights themselves trade, so a holder who will not subscribe can sell them instead of losing the value.
- 5
Take-up and rumpdays
Rights not taken up are placed with investors, and the proceeds go to the holders who did not act.
The vote — The shareholders decides. A company asking its owners for more money has to explain why, and the vote is where that is tested.
Underwriting stands — The underwriting banks decides. The banks agree to take whatever is not subscribed, and the conditions on which they may walk away are the most important terms in the agreement.
Who is on the deal
| Who | Side | What they are actually for |
|---|---|---|
| The company | Sell side | Asks its own owners for money, and has to explain why. |
| Every existing shareholder | Buy side | Is offered new shares in proportion, so nobody who participates is diluted. |
| The underwriting banks | Sell side | Agree to take whatever is not subscribed, which is what makes the money certain. |
| Sub-underwriters | Sell side | Institutions that take a share of that obligation from the banks, for a fee. |
| Buyers of the rights | Buy side | A holder who will not subscribe can sell the right instead of losing its value. |
- Desk
- Equity Capital Markets
- Offered to
- Every existing shareholder, in proportion
- Discount
- Often large, and mostly not a transfer
- The right itself
- Trades, so a holder who will not subscribe can sell it
- Usually
- Underwritten, so the money is certain
What decides whether it completes
Not how hard this is, and not a rating — there is deliberately no total. It says which of five blockers decides whether this transaction happens at all, in the same order on all 70 transaction types so they can be compared. This publication's own reading; see the notice below.
- Pricematters
- Financingmatters
- Approvaldecides it
- Diligencebarely applies
- Executiondecides it
What decides it here. Nobody is diluted who takes part, so the price matters far less than people expect. What decides it is whether shareholders will approve a company asking them for money, and whether the underwriting holds — a rights issue whose banks can walk away is not the certain money it appears to be.
3 · IntermediateHow it runs in practice
The theoretical ex-rights price
After the issue, the share price mechanically falls, because the same company is divided into more shares. The new level is the old value plus the new money, divided by the new number of shares. It is arithmetic, not a market judgement, and it is why a share price falling on the ex-rights date is not bad news.
The value of one right is the difference between that new price and the subscription price, adjusted for the ratio. A shareholder who sells their rights for that amount is exactly compensated for the dilution — which is the whole design.
Why the discount is set deep
A deep discount makes it near-certain that shareholders will subscribe, because not subscribing is obviously costly. That reduces the risk the underwriters are taking, which reduces what they charge. Since the discount costs shareholders nothing, an issuer that needs certainty should want it deep — the opposite of the instinct.
Underwriting, and what it is really for
Banks agree to buy whatever shareholders do not, and usually pass most of that obligation to institutions as sub-underwriters. What the company is buying is certainty: the money will arrive whatever happens. The clauses that matter are the ones setting out when the underwriters may walk away, because an underwriting that evaporates in a falling market is not the guarantee it looked like.
Pre-emption is a right, not a courtesy
In many jurisdictions shareholders have a legal right to be offered new shares before anybody else. Companies hold a standing authority to issue a limited number without asking; beyond it, a vote is needed. That right is the reason rights issues exist at all, and it is why an accelerated placing is capped in size.
4 · AdvancedThe numbers & the documents
The rump, and where the money goes
Rights not taken up are placed with investors after the deadline. What matters is what happens to the proceeds: in a properly structured issue, anything above the subscription price is paid to the shareholders who did not act. That is the safety net for the inattentive, and its presence or absence is one of the most important structural details in the terms.
What a rights issue signals
Two readings, and the market decides which:
- Investment. The company has more to do than it can fund internally, and is asking its owners to fund it. Neutral to good.
- Repair. The balance sheet needs fixing, or a covenant needs curing. The market reads a rescue issue as an admission, and prices it accordingly.
The tell is usually the use of proceeds, read against the leverage before and after. A company raising equity to repay debt is telling you what its lenders said.
Why other markets do this differently
Where pre-emption rights are strong, rights issues are the default for large raises. Where they are weaker, companies raise through follow-on offerings to new investors, which is faster and dilutes existing holders without compensation. Neither approach is better in the abstract: one protects the existing owner and takes weeks; the other is available overnight and takes something from them.
The arithmetic worth doing once
Take a company with 100 million shares at 10. It offers one new share for every four held, at 6. Twenty-five million new shares raise 150 million. The company was worth 1,000 million and is now worth 1,150 million across 125 million shares — 9.20 a share. A holder of four shares worth 40 now holds five worth 46, having paid 6. They are exactly level. The right to buy one share at 6 when the share is worth 9.20 is worth 3.20, which is precisely what the seller of a right receives.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow people on the deal think about it
Now say it back
Close the page and give Rights issue in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — name both sides and what each one is actually trying to get.
- What has to happen, in order — the three or four stages, not the whole timetable.
- Where the money comes from — cash, new shares, or borrowed; somebody has to fund it.
- What kills it — the ordinary way, not the dramatic one.
Where this transaction shows up elsewhere
- EasyFollow-on offeringDealA listed company selling more shares
- MediumAccelerated bookbuildDealA block of shares sold between the close and the open
- MediumEcmDeskHow a company lists and raises equity: the bookbuild, the price range, allocation, the greenshoe and the lock-up —…