A common form of equity fund raising is the conduct of a rights issue where existing shareholders of an issuer are given the right to purchase a specified number of new shares of the issuer, often at a discount to the market price. At the time of the announcement of the rights issue, issuers should disclose if there are directors or substantial shareholders who intend to or have provided undertakings to subscribe for their rights entitlements. Issuers should similarly disclose if such persons intend to submit excess rights applications and when there are changes to such intention. The disclosures would provide transparency to shareholders who can then decide whether to accept their provisional allotment of new shares and apply for excess rights shares. Where existing shareholders do not fully accept their provisional allotment of rights shares resulting in undersubscription of the rights issue, there will be excess rights shares that the issuer may allot to shareholders who submit excess rights applications.
From time to time, issuers may need to raise funds for various purposes including working capital and capital expenditure. In the current high interest rate environment, issuers may be prompted to review their capital structure and shift the balance towards raising equity instead of debt. Indeed, some issuers have raised equity for the purpose of paying down loans to avoid incurring high interest costs. Shareholders may also be supportive of the issuer’s fund-raising objectives and take a positive view on the issuer’s longer-term prospects.
Rights Issue
