A rights issue is an issue of rights to buy additional securities in a company made to the company’s existing security holders. When the rights are for equity securities, such as shares, in a public company, it is a way to raise capital under a seasoned equity offering. Rights issues are sometimes carried out as a shelf offering. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the firm at a specified price within a specified time. In a public company, a rights issue is a form of public offering (different from most other types of public offering, where shares are issued to the general public).
Rights issues may be particularly useful for closed-end companies, which cannot retain earnings, because they distribute essentially all of their realized income and capital gains each year; therefore, they raise additional capital through rights offerings. As equity issues are generally preferable to debt issues from company’s viewpoint, companies usually opt for a rights issue when they have problems raising equity capital from the general public and choose to ask their existing shareholders to buy more shares.
PROCEDURES REQUIRED
1 The original rights circular and any certified transfer form shall be filed with the Securities and Exchange Commission for registration. Rule 326 of the SEC Rules 2013
2 The issuer shall ensure that existing shareholders receive a copy of the rights circular or become aware of the offer not less than 21 Days before the opening of the offer. Rule 330 of the SEC Rules 2013
3 A Rights Circular approved and registered by commission shall be sent to every shareholder which shall contain inter alia:
i The rights price
ii The period for which the rights will be tradable on the securities exchanges. Rule 330 of SEC Rules 2013
4 Notice of rights shall as well be published in at least 2 national daily newspapers. Rule 324 of SEC Rules 2013
5 The next business day following the final date of the rights the period as stated in the right circular the SEC shall delist the rights
WHAT HAPPEN WHEN THE EXISTING SHAREHOLDERS UNDER SUBSCRIBED- Rule 337 of SEC Rules 2013
I The shareholders shall pass a special resolution that in the event of an under-subscription, their pre-emptive rights be waived.
Pre-Emptive Rights mean a privilege extended to the shareholders of a corporation that will give them the right to purchase additional shares in the company before the general public has the opportunity in the event there is a seasoned offering. It is usually contained in article of association of the company.
II The underwriter then, take up any unsubscribed shares.
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