Rights Issue

Subject – Economy

Context – The board of directors of Bharti Airtel has approved the company’s plan to raise up to Rs 21,000 crore by way of a rights issue.

Concept –

A rights issue is a mechanism by which companies can raise additional capital from existing shareholders.
While existing shareholders may not necessarily be able to participate in other fund-raising mechanisms like QIPs, preferential allotment etc, rights issue is a more democratic approach to raising funds as it allows the existing shareholders the right to invest first in the company.
Companies often offer shares in a rights issue at a discount on the market price.
Rights issues are used by companies seeking to raise capital without increasing debt.
Shareholders are not obliged to purchase shares offered in a rights issue.
For a rights issue, there is no requirement of shareholders’ meeting and an approval from the board of directors is sufficient and adequate.
Therefore, the turnaround time for raising this capital is short.
A company would offer a rights issue in order to raise capital which can be used to clear its debt obligations, acquire assets, or facilitate expansion without having to take out a loan from a bank.