RHS in Finance: Understanding Rights Issues

The abbreviation RHS in finance almost always refers to a Rights Issue. A rights issue is an offering of new shares to existing shareholders of a company. It gives them the “right,” but not the obligation, to purchase additional shares in proportion to their existing holdings. This allows shareholders to maintain their ownership percentage in the company and potentially benefit from future growth.

How a Rights Issue Works

Imagine a company, “GrowthCorp,” needs to raise capital for expansion. Instead of going directly to the market and diluting existing shareholder value significantly, they decide on a rights issue. GrowthCorp announces a rights issue with specific details, including:

• The Ratio: For example, a 1-for-5 rights issue means a shareholder can buy one new share for every five shares they already own.
• The Subscription Price: This is the price at which existing shareholders can purchase the new shares. It is typically offered at a discount to the current market price to incentivize participation.
• The Record Date: This is the date by which you must be a registered shareholder to be eligible for the rights.
• The Exercise Period: This is the timeframe during which shareholders can exercise their rights and purchase the new shares.

Shareholders then have three options:

1. Exercise the Rights: They can choose to purchase the new shares at the subscription price, maintaining their ownership percentage. This requires them to pay the company the necessary funds within the exercise period.
2. Sell the Rights: If they don’t want to buy more shares, they can sell their rights on the open market during the exercise period. The rights themselves have value because they allow the buyer to purchase shares at a discount.
3. Let the Rights Expire: If they do nothing, the rights will expire worthless. This is generally not advisable, as they are essentially throwing away potential value.

Why Companies Use Rights Issues

Companies utilize rights issues for several reasons, including:

• Raising Capital: The primary reason is to raise funds for various purposes, such as debt repayment, acquisitions, expansion plans, or working capital needs.
• Preserving Shareholder Value: Rights issues are generally considered less dilutive than placing shares directly with institutional investors because existing shareholders have the first opportunity to maintain their ownership.
• Avoidance of Debt: Raising capital through equity, rather than debt, strengthens the company’s balance sheet.

Considerations for Investors

Before participating in a rights issue, investors should carefully consider the following:

• Company’s Financial Health: Why is the company raising capital? Is it a sign of financial distress, or is it for a positive growth opportunity?
• Subscription Price: Is the discount offered attractive enough?
• Alternative Investments: Are there better investment opportunities available?
• Dilution Effect: Even though rights issues are less dilutive, consider the potential impact on earnings per share (EPS).

In conclusion, understanding rights issues and the implications of the RHS abbreviation in finance is crucial for any investor. By carefully evaluating the company’s rationale and the terms of the offering, investors can make informed decisions that align with their investment goals.