Rights issue and Preferential issue of Shares

WHAT IS RIGHTS ISSUE OF SHARES ?

Rights issue is one of the methods for a listed company to raise additional capital.
It is an offering of rights to the existing shareholders of a company that gives them an opportunity to buy additional shares directly from the company at a discounted price rather than buying them in the secondary market.

It is a right that a shareholder may or may not choose to exercise and not an obligation to buy the shares.

A company can issue right shares to its existing shareholders in proportion to their shareholdings by sending them a letter of offer.

PURPOSE OF ISSUING RIGHT SHARES

A Company may issue right shares to its existing shareholders due to the following reasons-

  • To reduce the debt-equity ratio of the company.
  • For company expansion, acquisition, takeovers or other general corporate purposes.
  • Companies facing financial problems may issue right shares to pay off their debts from the share money.
  • To control the interests of existing shareholders which may get affected if shares are allotted to outsiders.

 

Thus, Right shares are offered to company’s existing shareholders in proportion to their shareholdings in order to raise subscribed capital at a discounted price.

WHAT IS PREFERENTIAL ISSUE OF SHARES ?

Preferential Issue is the fastest way for a company to raise capital. A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 62 of the Companies Act, 1956 which is neither a rights issue nor a public issue.

This option facilitates those shareholders who are unable to buy a large chunk of shares due to high-cost availability on the market. 

A person holding preferential shares has the right to be paid from company assets before common stockholders if the company goes into bankruptcy. They usually do not have voting rights, and are rewarded only by dividends.

HOW TO ISSUE PREFERENTIAL SHARES ?

In order to issue and allot shares on a preferential basis, one needs to send a notice to convene a board meeting at least seven days before the meeting takes a decision on the proposed preferential Issue & complete other formalities like opening a separate bank account to receive money, convene an extraordinary general meeting, etc.

BENEFITS OF PREFERENTIAL ISSUE

  1. Preference shareholders have the right to claim unpaid dividend on succeeding year
  2. There is no brokerage cost involved, and the preference shareholders get priority over dividend
  3. this method of raising funds is the most convenient as it requires less paperwork.

Thus, in a nutshell Preferential issue of shares refers to the procedure of bulk allotment of fresh shares to a specific group of individuals or companies for raising funds.

Accounting & Finance for Banking

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