Introduction to Right Shares

Explanation of what right shares are

Right shares refer to the shares that are offered to the existing shareholders of a company in proportion to their current shareholdings. When a company wants to raise additional capital, it can do so by issuing new shares to the public or by offering the right shares to its existing shareholders. Right shares give shareholders the opportunity to maintain their proportional ownership in the company without having to buy additional shares from the market.

Importance of understanding the right shares

It is important to understand the right shares because they can have significant implications for shareholders. By understanding how right shares work, shareholders can make informed decisions about whether to participate in a right share offering or not. If shareholders decide to participate, they can maintain their proportional ownership in the company and potentially benefit from any future growth in the company's value.

Additionally, the right shares can also impact the value of a company's shares in the market. When a company issues the right shares, it increases the total number of shares outstanding, which can dilute the value of existing shares. Shareholders who do not participate in the right share offering may see their proportional ownership in the company reduced, which can impact the value of their investment.

Overall, understanding the right shares is important for both current shareholders and potential investors, as it can impact their own and potential returns in a company.

What are the Right Shares?

Definition of right shares

Right shares refer to new shares of a company that are offered to existing shareholders in proportion to their current ownership. These shares are issued at a discounted price to the current market price of the company's shares.

How they differ from bonus shares

The right shares differ from bonus shares in that bonus shares are additional shares issued to existing shareholders free of charge, whereas right shares are issued at a discounted price. Bonus shares are issued to reward existing shareholders and to increase the liquidity of the company's shares in the market.

Why do companies issue the right shares?

Companies issue right shares to raise additional capital from existing shareholders, who have the first right to purchase the new shares. By offering the right shares, companies can avoid diluting the value of existing shares by limiting the number of new shares available to outside investors. Right shares are also a cost-effective way for companies to raise capital, as they do not have to pay underwriting fees or other expenses associated with issuing shares to the public. Additionally, the discounted price of the right shares makes them an attractive investment opportunity for existing shareholders.

How to Apply for Right Shares

Eligibility Criteria for Applying for Right Shares:

To be eligible to apply for the right shares, you must fulfill the following criteria:
You must be a registered shareholder of the company issuing the right shares as of the record date.
You must have paid all the outstanding dues on your existing shares, including any unpaid dividends.
You must have a valid Central Depository System (CDS) account if the shares are listed on the stock exchange.

Procedure for Applying for Right Shares:

The procedure for applying for right shares varies depending on the company's policies and regulations, but generally involves the following steps:

Notification: The company will issue a notice to all eligible shareholders informing them of the issuance of the right shares, including the number of shares offered and the subscription price.

Prospectus: The company will also issue a prospectus containing all the details about the right shares, including the terms and conditions of the offer, the subscription price, and the deadline for applying.

Application Form: Shareholders who wish to apply for the right shares must fill out an application form, which will be included in the prospectus.

Payment: Shareholders must make the payment for the right shares within the prescribed time period. The payment options may include cash, cheque, online banking, or any other method specified by the company.

Submission: Once the payment is made, shareholders must submit the application form along with the payment receipt to the designated bank or registrar.

Payment Options for Right Shares:

The payment options for right shares may vary depending on the company's policies and regulations, but generally include the following:

Cash: Shareholders can make the payment in cash by depositing it at the designated bank or registrar.

Cheque: Shareholders can also make the payment by issuing a cheque in favor of the company and submitting it along with the application form.

Online Banking: Many companies now offer online payment options, allowing shareholders to pay for the right shares through online banking services.

Other Methods: The company may also specify other payment methods, such as mobile payments, e-wallets, or payments through ATMs.

In conclusion, to apply for the right shares, you must fulfill the eligibility criteria and follow the company's procedures for applying and making the payment. It is important to read the prospectus carefully and submit the application within the prescribed deadline to avoid any delays or complications.

Advantages of Right Shares

Benefits for Shareholders:

Opportunity to Increase Shareholding: Right shares allow existing shareholders to increase their shareholding in the company by subscribing to additional shares at a discounted price. This increases their ownership percentage and potential for future dividends.

No Dilution of Ownership: Since right shares are only offered to existing shareholders, their ownership percentage in the company is not diluted by the issuance of new shares to outsiders.

Better Price: Right shares are usually offered at a discounted price compared to the market price, which provides shareholders with a better price for acquiring additional shares.

Flexibility: Shareholders have the flexibility to either exercise their right to purchase additional shares or sell their rights to other investors in the market, thereby generating additional income.

Advantages for Companies:

Increased Capital: Right shares provide an opportunity for companies to raise additional capital without incurring high underwriting or brokerage costs associated with public offerings.

Retention of Control: Since the right shares are offered only to existing shareholders, the company can retain its control and prevent dilution of ownership by outsiders.

Positive Signal to the Market: The issuance of the right shares signals to the market that the company is financially stable and has growth potential, which can lead to increased investor confidence and improved stock performance.

Improved Liquidity: The issuance of the right shares can improve the liquidity of the company's stock by increasing the number of outstanding shares and attracting more trading activity in the market.

Disadvantages of Right Shares

Risks for Shareholders:

Obligation to Pay: Shareholders who exercise their right to purchase additional shares through right shares are obligated to pay for the shares, even if the market price of the stock falls below the subscription price.

Limited Time Frame: Shareholders have a limited time frame to exercise their right to purchase additional shares through the right shares, which can create pressure and lead to suboptimal investment decisions.

Over-subscription: In some cases, the demand for the right shares can exceed the number of shares available, resulting in over-subscription and reducing the likelihood of shareholders receiving their desired number of additional shares.

Limitations for Companies:

Limited Reach: Right shares are only offered to existing shareholders, which can limit the potential pool of investors who may be interested in investing in the company.

Administrative Costs: Issuing the right shares can be administratively burdensome and expensive for the company, as it requires managing the subscription process, coordinating with shareholders, and managing the allocation of shares.

Negative Signal to the Market: The issuance of the right shares can sometimes signal to the market that the company is in financial distress or facing liquidity problems, which can lead to a decline in investor confidence and stock price.

Difficulty in Selling Unsubscribed Shares: If some of the right shares are not subscribed, the company may find it challenging to sell the remaining shares in the market, which can lead to a decline in the company's stock price.

How to Evaluate Right Shares

Investors should consider the following factors before investing in the right shares:

Company Fundamentals: Investors should assess the company's financials, growth prospects, and overall performance to determine whether the issuance of the right shares is a positive signal for the company's future growth and profitability.

Subscription Price: The subscription price for the right shares should be evaluated against the current market price of the company's shares to determine whether it represents a discount or premium. Investors should also consider the potential for future dilution of their ownership stake if the company issues additional shares in the future.

Market Conditions: Investors should consider the current market conditions and the company's position within the industry to assess whether the issuance of the right shares is a good investment opportunity.

Availability of Funds: Investors should ensure that they have sufficient funds to exercise their right to purchase additional shares and assess the potential risks associated with borrowing or using leverage to finance the investment.

Risks to be aware of:

Market Risk: The stock price of the company may decline, and investors may lose money if they purchase the right shares at a subscription price that is higher than the market price.

Over-subscription Risk: If the demand for the right shares exceeds the number of shares available, investors may not be able to purchase their desired number of shares, leading to potential losses.

Regulatory Risk: There may be changes in regulations governing the issuance of right shares, which could impact the potential returns of the investment.

Company-specific Risk: The company's financials, growth prospects, and overall performance may change after the issuance of the right shares, which could impact the potential returns of the investment.

Liquidity Risk: The market for the company's shares may be illiquid, making it difficult for investors to sell their shares at a fair price.

Conclusion

In summary, right shares offer benefits for both shareholders and companies. Shareholders can increase their ownership percentage and potential for future dividends at a discounted price, while companies can raise additional capital without incurring high underwriting or brokerage costs. However, investors should consider various factors such as company fundamentals, subscription price, and market conditions before investing in the right shares. They should also be aware of potential risks such as market risk, over-subscription risk, and regulatory risk.

Final Thoughts:

Right shares can be a good investment opportunity for investors who have done their due diligence and assessed the potential risks and rewards of the investment. However, investors should always diversify their portfolios and not rely solely on one investment strategy. Additionally, companies should consider the administrative burden and potential negative signals to the market before deciding to issue the right shares. Overall, the right shares can be a valuable tool for companies to raise capital and for shareholders to increase their ownership percentage in a company.