When a company needs additional capital and keeps the voting rights of the existing shareholders proportionately balanced, the company issues Rights shares. The issue is called so as it gives the existing shareholders a pre-emptive right to buy new shares at a price that is lesser than market price. The Rights issue is an invitation to the existing shareholders to buy new shares in proportion to their existing shareholding.
As the company expands, it looks for ways of capital expansion, so the company turns to the issue of shares. In place of issuing shares to the public at large, which will bring about an imbalance in the voting rights of the existing shareholders, the company resorts to issuing additional shares to the existing shareholders in proportion to its current shareholding. So this resolves the purpose of additional capital while letting existing shareholders retain their voting rights.
According to Section 62 (1) of the Companies Act 2013, the procedure for issue of shares is as follows:
The issue of right shares is in the benefit of the existing shareholder and provides them with an advantage of applying for the shares at a discounted price and retaining their voting rights. A company can raise a significant amount of the share capital by resorting to the issue of rights shares.
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