Rights Issue Shares

As an investor, it is very vital for you to fully understand the workings of share issuance and rights. Hence, in the simplest terms possible, the moment that a company involves the shareholders in order to get additional capital, while at the same time, issuing shares at a discounted rate, in particular for these existing shareholders, then this is what is known as rights issue shares. The main idea during this entire process is for the company to get the additional capital from these shareholders without first going for any external alternatives.

This Is So Especially For Those Companies, Which Have Gone Very Deep Into Debt.

Why Right Issue Shares?

This is the most fundamental question that you should ask when it comes to Issue Of Shares, if you are to fully understand share issuance. Of course, any company can easily go to the bank or any other financial institution for a loan. If it is very to get a loan from these institutions, then why go the route of rights issue shares then? As we shall see, there are a number of valid explanations, as to why a company opts to go for the rights issue as opposed to external debt.

Here Are The Following Reasons For Which A Company Goes For Rights Issue Shares-

When companies do not have enough cash flow: Any company that does not have enough cash flow or are already deep in debt, they normally do not want to go for any external debt, in order to raise additional cash as it will burden them further. They would rather approach their shareholders to enquire if there is any chance that they could be interested in some additional shares at a discounted price. However, not all of them will be interested, nonetheless, the majority might go for the idea.

When companies are looking to grow: In order for right of shares to be issued, it necessarily does not mean that the company is facing any financial difficulties.You may find that most of these companies have very healthy books of account and all that they want is additional capital for expansion and continuity.

How Do Rights Issue Work?

At this point in time, existing shareholders have these options:

  • They can choose to buy the right shares: Of course, this is what is what is expected of them. The more the right shares, the more the capital.
  • They can choose to ignore the right issue shares: Quite a good number of shareholders may choose to ignore this idea of buying more shares, especially if the company’s books of account is showing dismal results.
  • They can choose to buy the shares and Issue Of Shares: Some of the shareholders may buy the shares, however, they may opt to sell them to other investors. Making profits in the long run. Moreover, the company would have raised the required capital also.

In This Regard, Should A Company Issue Right Shares? How Will It Benefit?

A clear response here is yes. However, prior to this, they should clear the air on how the capital raised will be utilized. How will the existing debt be paid? Will the new cash flow be injected in the already existing venture or a new project?Once everything has been ironed out, then they can go ahead with the rights issue.

Issuing Shares Checklist

  • It is also important to ascertain that the Issue Of Shares is in compliance with the rules and regulations of the Companies Act, Articles of Association or any shareholders’ agreement.
  • Furthermore, in case of any hurdle, then you can easily have them sorted out by convening a general meeting or through a written resolution.

Write To Or Verbally Offer The Shares To The Intended Recipients.

It is thus very important to either convene a meeting or produce a written resolution for approving the issue. In case a meeting takes place, there should be proof of minutes, which should be filed with the company’s statutory records. Additionally, in case a resolution is written, then it should also be filed with the company’s statutory records as well.

After receiving the payments, then Companies House form SH01, should be duly filled and can be downloaded from the website of the company. Thereafter, the duly completed forms are sent to the address indicated on the form. It should thus be filed in a month’s time for the allotment of shares.

Share certificates, which have been duly completed should be filed in the statutory books, within a span of two months of the board making the allotment.

In addition, the company’s Register of Allotments and the Register of Shareholders should be updated as well. This is normally located in the company’s statutory books, and it should be within a two months’ period of the board making the allotment.


By now, you are familiar with the Issue Of Shares process and share capital, including ways of nominating shareholders and the types of shares to be issued. It is also important to have a rough idea on the kinds of legal structure, best suited for your business.

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