A private or public company may wish to raise capital through its existing shareholders by way of a rights issue, which involves an offer of new shares or other securities made to existing shareholders pro rata to their shareholdings. The subscription price of a rights issue made by a listed company is generally at a discount to the market price of the existing shares, which acts as an inducement/incentive to shareholders to take up the offer. A listed company may also decide to make a rights issue at a deep discount, that is at a substantial discount from market value, in order to save underwriting fees or otherwise encourage a full take-up of the issue. A discounted rights issue will generally have the negative effect on a company of immediately reducing the market value of its shares, so the deeper the discount the greater the drop in value.
Rights issues are popular among shareholders as a way to raise finance for the company because the shareholders can buy shares relatively cheaply without their shareholdings being diluted, as would be the case, for example, on an initial public offering (IPO). Also, most often where a listed company is undertaking a rights issue, the shareholders will generally be given a right to subscribe for shares, and this right may be sold in the market nil paid, at market value. This gives the shareholder a profit without having to make any capital outlay, although it has the detrimental effect of diluting the shareholder’s percentage holding.