Companies often require additional funds for their working capital, or for their expansion and diversification programmes. They sometimes raise these funds by the sale of additional equity shares on a "rights basis" to its shareholders. Such shares are called "rights shares" because the company's shareholders have a prior right to buy these shares by virtue of their existing shareholding. The number of rights shares offered to each shareholder is directly proportionate to the number of equity shares he owns. Rights shares could either be offered at par, or at a premium. When such shares are offered for sale at their face value, they are said to be offered at par, and when the sale price is higher, they are said to be offered at a premium. Premium is the difference between the issue price of a share and its face value. In order to make the issue attractive, the price of rights shares is invariably fixed at a level below the prevailing market price of the company's share. The issue of rights shares increases the equity capital of the company but does not dilute an existing shareholder's proportionate ownership in the company, if he subscribes to his rights entitlement in full.
