Rights Entitlement Offers, also known as rights issues, are an effective and strategic approach for companies aiming to raise capital through existing shareholders. They represent a unique way of capital accumulation by allowing shareholders to purchase additional shares in a company they already own, primarily at a discounted rate. These offers are typically underwritten to ensure that the business can guarantee its existing shareholders the opportunity to acquire the stipulated shares and raise the targeted capital, even if the initial response to the issue is not as expected. It is worth noting that this instrument is now quickly gaining traction, with Rights Entitlement Offers being underwritten to $1.6M recently.
There are multiple reasons why a company might choose to route capital augmentation through Rights Entitlement Offers. Primary among these reasons is mitigating the possible dilution of shareholding, that might arise from conducting public offerings or inviting investments from external entities. By catering primarily to existing shareholders, companies ensure that the control of the company remains within a specific group. Another reason is that capital raised through Rights Entitlement Offers generally carries a lower cost as compared to capital raised through debt instruments.
Underwriting is a critical facet of Rights Entitlement Offers. An underwriter or a syndicate of underwriters agrees to take up any or all shares not subscribed for by the existing shareholders. Essentially, they guarantee that the issuer will receive the required capital through the Rights Entitlement Offer, up to the agreed limit. The recent underwriting of Rights Entitlement Offers to $1.6M showcases the increasing prominence and potential of this instrument, while also subtly insinuating the surging confidence of underwriters and issuers in this approach.
Underwriting also exhibits certain risks that need to be underlined. Since the underwriters commit to underwrite any unsubscribed portion of the issue, they carry the possibility of having to purchase the unsubscribed shares. While this also gives them an opportunity to resell these shares in the secondary market and possibly realize profits, it creates a risk of incurring losses if the shares cannot be sold at profitable rates.
Further, existing shareholders also need to make informed decisions when rights issues are presented before them. They must consider their cash reserves, evaluate the discounted rate at which these additional shares are being offered, and also the potential future growth of the company and its shares before participating in the Rights Entitlement Offer.
In the landscape of corporate finance, Rights Entitlement Offers underwritten up to $1.6M symbolizes an efficient method of capital accumulation