Rights issue and private placement are the two ways to issue shares, other than initial public offers, through which a company can raise money in the primary market by issuing its securities
1. Rights Issue
When a company issues additional equity capital, it has to be offered in the first instance to the existing shareholders on a pro rata basis. When a company proposes to issue its shares to its existing shareholders, it is called a rights issue. The company announces a record date and shareholders of the company on that date get a right to subscribe to the rights issue. These rights are also called “rights entitlement”. The shareholders can also renounce their rights. The company sends a letter of offer to its shareholders, which mentions all details relevant to rights issues. The shares allotted to shareholders are proportional to their existing stake in the company.
Assume that you currently hold one per cent of company’s equity. If a company is offering 100 shares in a rights issue, you have the right to buy one per cent of 100 shares, which is one share.
A Unlike an IPO, no new shareholders are added to the existing family of shareholders.
B As the number of shareholders remains the same, the stake of each shareholder in the company also remains the same.
C However, as the new shares are issued, the earning per share is reduced.
2. Private placement
When a company issues shares to a select group of investors, instead of inviting public at large, it is called private placement of shares. It falls neither in the category of a public issue, nor a rights issue. It is a faster way of raising capital, as a company has to comply with fewer requirements.
A When a listed company issues shares privately, it is called preferential allotment.
B When a listed company issues shares privately to qualified institutional buyers, it is called qualified institutional placement.
C If new shares are issued in private placement, the earning per share gets diluted.