Rights Stocks

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 stocks on a "rights basis" to its stockholders. Such stocks are called "rights stocks" because the company's stockholders have a prior right to buy these stocks by virtue of their existing stockholding. The number of rights stocks offered to each stockholder is directly proportionate to the number of equity stocks he owns. Rights stocks could either be offered at par, or at a premium. When such stocks 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 stock and its face value. In order to make the issue attractive, the price of rights stocks is invariably fixed at a level below the prevailing market price of the company's stock. The issue of rights stocks increases the equity capital of the company but does not dilute an existing stockholder's proportionate ownership in the company, if he subscribes to his rights entitlement in full.