Right share is share which the company provides a right to buy share directly from company for existing shareholders in the proportion of their existing holding within the fixed period of time. Right share are generally issued at a discount to the current market price; issued at face value ie Rs.100. Right share are transferable to others if needed.
Right shares are offers to sell for existing shareholders. Each & every shareholders have right to buy the right shares issuing by the company. But existing shareholders have no obligation to buy right share, they can grant right to another person or leave without buying.
Sometime all right share are not fully subscribed by shareholders. These unsold right share are brings into auction by company. The company will sell the unsold share through auction for public.
Why right share are issued?
Basically, the company issue right share to hike or raise capital/fund. They issue right share for variety of reason like pay off debt, purchase equipment, business expansion, acquiring another company, developing next plant, etc.
Merit: Right offering save underwriting fees of company & shares are provided in discount to market price or at par for shareholders. Right shares can be sold at market price which is more than par or Rs.100.
Demerit: Right offering brings flood of shares in market which decreased the value of available shares. It is only opportunity provided for existing shareholders to buy additional shares. Right share leads to losses if somebody missed to buy right shares due to right share price adjustment.
Process: Firstly, board meeting of company decided to float right share. Secondly, the decision is presented in AGM/SGM. After approval from SGM/AGM, the company will appoint issue manager and then apply for approval from Security Board.
After approval from Security Board, the company will announce book closure date. Shareholders who get registered in book or buy shares one day before book close will be eligible for right shares. After book closure date price will be adjusted.
Example: Suppose a company to float 50% right share if price before book close was Rs.500 than price after book close is calculated as follows;