Rights Issue - Business concept of the day

Definition: A rights issue is an issue of additional shares to existing shareholders of a company. Value of the shares issued this way to existing shareholders are generally lower than the market prices and are offered to the shareholder in proportion to their existing stake/ownership in the company. This is also referred to as cash call.

Example: Mr. John currently holds 1000 shares at $30 each of a FinTech Company which is currently financially troubled. In order to raise additional capital to meet its financial obligations, the board approved a rights issue a 'three for 10' to raise $50 million through 2 million shares at a discounted rate of $25. With this right issue, Mr John has a right, not an obligation to be able to purchase 300 shares at $25 instead of current market price of $30. 

Business Insight: Rights issue are of two types -- renounceable & non-renounceable depending upon the type of right issue a board of the company approves. In renounceable type, the existing shareholder can sell these rights to other investors and underwriters at an 'ex-rights' price. However, in non-renounceable type, the rights can't be transferred to anyone else.