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Last Updated: Wednesday, 20 March, 2002, 09:29 GMT
Rights issues explained

What is a rights issue?

If you're a shareholder in a listed company, you could be offered the chance to buy new shares in the company. This is known as a rights issue.

Why do they happen?

Like any share sale, rights issues are a way for a company to raise money without having to borrow it.

Instead you, the shareholder, are asked to provide the extra capital, which might be used for expansion, a takeover or to prevent the company going bust.

Even if you choose to do nothing at all, you are still in line for some money

By offering current shareholders the first chance to buy the new shares the company gives them a chance to maintain their percentage stake in the company.

If new shares were issued directly to the stock market it would dilute the ownership of current shareholders.

How many can I buy?

You are usually offered a set number of new shares for every original share you own.

The new shares should be sold at a fixed discounted price that is below the current market price.

How will I know about the offer?

As a shareholder you should receive a "provisional allotment letter", giving you all the details of the shares you can buy.

Do I have to buy the new shares?

You can choose to buy all, some or none of these new shares.

If you opt not to buy the shares then you can still sell your rights to buy the shares. To do this you will have to notify the company and they will sell the rights on your behalf.

Even if you choose to do nothing at all, you are still in line for some money. Once a rights issue has lapsed your company will automatically assume you wanted to sell your rights and you will get the proceeds of that sale minus the costs.

But be warned - the chances are you will get less money if you do nothing than if you actively opt to sell your rights.

Should I buy the shares?

It's up to you.

Remember, taking up the rights will increase your personal exposure to the company. Make sure you are comfortable with this and that it fits in with your investment aims.

You might choose to buy the discounted shares if you believe that the share price will go up, making you a profit. But if the share price falls below the rights subscription price, it would be cheaper to buy the new shares on the open market and not take up your rights Issue.

What happens if I hold the shares through a fund?

You should check with your broker or plan provider as soon as possible on what options they are allowing.


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