Glossary · UK
What is Rights Issue?
An offer giving existing shareholders the right to buy new shares in a company, usually at a discount to the market price and in proportion to their existing holding, to raise fresh capital.
Full Definition
A rights issue is a method a listed company uses to raise additional capital by offering its existing shareholders the right, but not the obligation, to buy new shares in proportion to their current holding, typically at a price discounted below the shares' current market value to make the offer attractive. A company might launch a rights issue to raise funds for expansion, to pay down debt, to shore up its balance sheet after a period of losses, or to fund an acquisition, and because existing shareholders are given first refusal in proportion to their existing stake (commonly expressed as a ratio, such as "1-for-4," meaning a holder of 400 shares is entitled to buy 100 new ones), a rights issue avoids diluting existing shareholders' proportionate ownership of the company provided they take up their full entitlement. Shareholders typically have three choices when a rights issue is announced: take up the rights and buy the new shares at the discounted price, sell the rights themselves (since the right to buy at a discount has its own tradeable value, known as "nil paid rights," on the stock market during the offer period), or do nothing, in which case the rights typically lapse and, in many rights issues, the company sells the unclaimed shares on the shareholder's behalf and pays them any premium achieved above the discounted issue price. For UK Capital Gains Tax purposes, taking up a rights issue is treated as adding to the shareholder's existing holding of that company within the Section 104 share pool, with the amount paid for the new shares added to the pool's total cost, rather than as an entirely separate acquisition, meaning the pool's average cost per share is recalculated to blend the original holding with the new, typically-discounted shares; selling nil paid rights, by contrast, is itself a disposal for Capital Gains Tax purposes and may trigger a small gain calculated with reference to the value of the original shareholding under HMRC's "small disposal" rules if the proceeds are modest relative to the value of the shares held. Because a rights issue increases the total number of shares in circulation, a shareholder who does not take up their rights will see their percentage ownership of the company diluted, even though the cash value of a rights issue they choose to ignore is not simply lost, provided the company sells their unclaimed rights and pays them the resulting premium.