What is the primary purpose of a Rights Issue?

What is the primary purpose of a Rights Issue?

• A. To reward existing employees
• B. To raise funds by offering new shares to existing shareholders at a discount
• C. To reduce the company's debt immediately
• D. To delist from the stock exchange

Answer: (B)

A rights issue is a way for a company to raise new capital by offering additional shares to existing shareholders, usually at a discount and on a pro rata basis. The discount acts as an incentive for shareholders to participate, helping the company quickly obtain fresh funds without involving new external investors. This approach can help strengthen the balance sheet, fund growth, or support debt repayment, while allowing current owners to maintain their relative ownership if they exercise their rights. If shareholders don’t take up their rights, their ownership percentage will be diluted, which is a consequence of not participating. This differs from rewarding employees, which uses equity for compensation; using funds to reduce debt is a potential outcome but not the defining purpose; and delisting is an unrelated action aimed at leaving the stock exchange.

A rights issue is a way for a company to raise new capital by offering additional shares to existing shareholders, usually at a discount and on a pro rata basis. The discount acts as an incentive for shareholders to participate, helping the company quickly obtain fresh funds without involving new external investors. This approach can help strengthen the balance sheet, fund growth, or support debt repayment, while allowing current owners to maintain their relative ownership if they exercise their rights. If shareholders don’t take up their rights, their ownership percentage will be diluted, which is a consequence of not participating. This differs from rewarding employees, which uses equity for compensation; using funds to reduce debt is a potential outcome but not the defining purpose; and delisting is an unrelated action aimed at leaving the stock exchange.