Preferential Issue, Right Issue (for existing companies)
February 17, 08 by FinanceTurfThis is the practice followed by a company to make preferential allotment of securities to selected persons, who are normally the promoters, etc.
At a price unrelated to the prevailing market price.
The advantage is that funds are obtained at a minimal cost as compared to the public issue or the private placements methods.
But preferential allotments have been sometimes misused by companies.
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Each shareholder has the right to subscribe to the new shares in the portion of shares he already holds.
The shareholder may either accept the offer for himself or assign a part or all of his rights to another.
Such rights are valuable to shareholders as they are at price below the current market price.
The right issue is an inexpensive and convenient way of raising additional capital as compared to the amount already issued.
A rights issue to the existing shareholders is a mandatory requirement.
The issue of additional shares to other parties without giving the existing shareholders the opportunity to subscribe would reduce the existing shareholders’ proportion of the total capital; i.e.it would ‘water’ their equity.
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