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One mode of raising capital through Equity Financing is the Rights Issue. A Rights Issue involves giving
existing shareholders the right, not an obligation, to acquire additional shares (new shares) in the company, at a discount (rights offer price) to its current market price. It is structured in the form of an invitation to the company’s current shareholders, of which one must be a shareholder on the record date to earn eligibility.
Unlike an Initial Public Offering, the Rights Issue is offered only to the existing shareholders, not the public, in proportion to their existing company shareholdings. In response to the offer made to the shareholders, the shareholders can either subscribe to the rights offering in full or part or can let the offer lapse by ignoring the Rights Issue. In cases where the rights are transferable, the shareholder is allowed to sell his or her rights to other investors or the underwriter. The rights that can be traded are referred to as renounceable rights, whereas the non-tradeable ones are called non-renounceable rights. Examples of companies that have previously offered Rights Issues include Flour Mills of Nigeria, Union Bank Plc, Prestige Assurance Plc, & Unilever Nigeria Plc, amongst others.
Why Companies Do Rights Issue?
- Companies can issue Rights Shares to raise funds for growth and expansion
- Funds raised from Rights offerings can be used in launching new products.
- Proceeds from Rights offerings can be used to pay off outstanding obligations/debts.
- Companies can use funds raised to finance the acquisition of another company or a merger process.
- For projects where debt funding may not be suitable or available.
- Companies carry out a Rights Offering when looking to improve their debt-to-equity ratio.
PROS
To the Shareholders
- It allows them to increase their shareholding in the company at a discounted price.
- Where the rights are exercised, existing shareholders’ stakes are not diluted.
To the Company
- Rights issue offers one of the best ways to raise capital without incurring additional debt financing from the banks on high interest rates thereby cutting the finance cost for the organization.
- The cost of undertaking a Rights Issue process is cheaper and faster than seeking to raise capital through an initial public offering process.
CONS
To the Shareholders
One major disadvantage to the Shareholders is the exposure to the potential dilution of Equity. This occurs when shareholders who do not exercise their rights, find their percentage of shareholding declines, due to the allotment of new shares.
To the Company
There is a limit to how much a company can raise through issuing Rights shares, as existing shareholders are only willing to invest so much, therefore limiting the company from meeting its capital raising target.
How Can MCL Help?
Meristem Capital Limited acts as an Issuing House on Equity Market transactions such as a Rights Issue process by providing and guiding its clients on the appropriate structures to embark upon, whilst negotiating with all relevant regulatory authorities and liaising with all the professional parties involved. Amongst the services MCL provides as Issuing House is the conduction of valuation, to determine the most suitable rights offer price.
We are currently one of the Issuing Houses of Access Holdings Rights Issue that opened on July 8, 2024. Do you currently have Access Bank’s shares? You can take advantage of this offer. If you want to start a seamless world of stock trading, you can get started with us at Meristem Stockbrokers Limited today.
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