Rights issue
Capital MarketsAn offer letting existing shareholders buy new shares at a discount, in proportion to what they already hold.
A rights issue raises equity from the people who already own the company. Each shareholder receives the right to subscribe for a set number of new shares at a discount to the market price, proportional to their existing holding.
Because it is pro rata, a shareholder who takes up their rights is not diluted at all: their percentage ownership is unchanged, and the discount they pay is offset by the fall in the share price that follows the issue. A shareholder who does nothing is diluted, which is why rights can usually be sold in the market.
It is the standard large equity raise in Europe and the UK, where pre emption rights are strong, in contrast to the US where a placing to new institutions is more common. That difference is a genuine regional distinction worth knowing.
Deeply discounted rights issues are common in distress, since a large enough discount makes the offer attractive almost regardless of the news, but they signal weakness and are usually underwritten by banks who take the risk of shortfall.
Worked example
A company with 100 million shares at €10.00 raises €200M through a 1 for 2 rights issue at €4.00.
It issues 50 million new shares. The theoretical ex rights price is the total value, €1,000M plus €200M, over 150 million shares, so €8.00.
A shareholder taking up their rights is unaffected: they held €10.00 of value and now hold two shares at €8.00 having paid €4.00 for one. One who does nothing sees €10.00 become €8.00, which is why unexercised rights are sold in the market.