Right issue by Indian companies a critical study

Abstract

Capital market is the market for the buying and selling of long-term financial instruments, such financial instruments include; ordinary shares, preference shares, bonds, mortgages. In capital market listed or unlisted companies can use many different types of corporate actions to raise funds, which in turn effect the liquidity and price of their shares in the market. There are various methods that a company can use to raise equity finance, some of such methods include obtaining lists on the stock market and selling some of its shares to the general public, other methods may include placing and bought deal. If the company is not yet listed on a stock exchange, the company can prepare for an initial public offering (IPO), in which it will be valued and an opening price will be set for its shares when they are released on the market. How much finance can be raised through an IPO depends partly on the perceived value and the share price of the company and partly on how much interest there is in the shares when that are released on the market. newlineFor a company that is already listed on an exchange, an alternative route is to launch an additional share issue (also known as a seasoned equity offering, or SEO) or a rights issue. Right shares are those shares which are issued to existing shareholders. According to section 81 of Indian Company Act 1956, Company can issue right shares only after the two years of creation of company or one year of first issue of shares whichever is earlier.quot newlineA SEO is a new equity issue by a company following its IPO. A rights issue is an invitation to current shareholders to purchase additional new shares in a company. This type of issue gives the right to existing shareholders to purchase new shares, generally at a discount on the current market price on a future date. Therefore the company is giving an opportunity to shareholders to increase their holding at a discounted price. Companies may use rights issues to raise cash as an alternative to bank financing, funding acquisitions and paying down debt in order to finance future growth. For reassurance that it will raise the required finance, a company may have its rights issue underwritten by an investment bank, which would take delivery of all stock that was not taken up with the issue. Renounceable rights are rights offered by a company to existing stockholders to purchase further stock, usually at a discount. These rights have a value and can be traded. If rights are to be issued, the company has to set the price of the new shares, determine how much it will sell, and assess how the current share value will be affected as well as the effect on new and existing stockholders. Non-renounceable rights are not transferable and cannot be bought or sold, these rights must be taken up or that will be lapsed. newline