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Right issue is an offer to company’s existing shareholders to buy additional new shares. It is termed as “Right Issue” because firm offers its shareholders the right to purchase more shares in a proportion to their existing shareholding (no. of shares) held as on the record date.
For instance, ABC Ltd issues right shares in the ratio of 1:5 means shareholders can purchase 1 right share for every 5 fully paid-up equity shares held on the record date. If a shareholder owns 25 shares of the company on the record date then he will be eligible to get Right Entitlement for 5 right shares.
A company may issue right issue to raise capital for various purposes i.e. to pay debt, meet working capital and long-term capital requirement, and general corporate purpose. However, investors can benefited from it because right shares are issued at a lower price than the share market price. Thus, shareholders can purchase more number of shares in a company at a discounted price.