ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A rights issue is an offer made by the company to buy additional shares of the company. This is not compulsory, and shareholders can refuse to buy additional shares if they do not see any value in the extra shares in their portfolios.

Detailed explanation-2: -Rights Entitlement (RE) is the rights issued by the company to the existing shareholders to subscribe to the new shares / other securities that the shareholder of a company is eligible to apply for under the rights offer.

Detailed explanation-3: -A rights issue is a prevalent form of corporate action where the company invites existing shareholders to buy additional shares in the company at a discounted price within the said period (the cut-off date). Now, as existing shareholders of the company, you do not have an obligation to buy additional shares.

Detailed explanation-4: -Q. Can applicants who are not existing shareholders of the issuer company as of the record date/ex-date apply for the rights issue? Yes, by purchasing the REs, a person who is not an existing shareholder of the issuer company can apply for the rights issue.

Detailed explanation-5: -Share Dilution When companies issue additional shares, it increases the number of common stock being traded in the stock market. For existing investors, too many shares being issued can lead to share dilution. Share dilution occurs because the additional shares reduce the value of the existing shares for investors.