When a company needs to raise capital it may choose to create a new block of shares and offer them to existing shareholders at a discount. The announcement of a rights issue will often result in the share price falling initially because the market will question the motives of the company if it needs to raise money but also because the new shares issued will 'dilute' the existing shares. The company's objective is to provide current shareholders the opportunity to maintain their percentage of ownership of the firm.

Some companies will be raising cash to fund expansion or acquisitions, and shareholders may be keen to participate in a compelling growth story. Alternatively, funds may be required to 'strengthen balance sheets'. This could mean that existing lenders want some of their money back or the company wants to avoid breaching covenants on existing loans. This might not be as compelling to investors as a growth story, but the reasons are no less logical.

• With this type of issue existing shareholders are given 'nil-paid rights' which simply provide the right to purchase new shares at a discount to the market price on a stated date.
• Until the date at which the new shares can be purchased, shareholders may trade the nil-paid rights in the same way they would trade ordinary shares.
• Some companies that offer a rights issue will use the capital to fund activities such as acquisitions that will afford the company future growth. In order to provide assurance that the required capital will be raised, the company will normally have its rights issue underwritten by an investment bank.

• It is easy to be enticed by shares offered at a discount, but shareholders should not assume that they are getting a bargain. An informed decision should be made by looking at the rationale behind the fund raising exercise i.e. how will the capital be used?
• A company may use a rights issue to cover debt, especially when they are unable to borrow money from other sources. Shareholders should be concerned with whether or not the management are addressing any underlying problems.
• If you decide not to take up the rights your overall shareholding in the company will be diluted as a result of the increased number of shares in issue.
• If you do not participate in the rights issue your nil-paid rights will lapse. The company will sell these entitlements and distribute any net proceeds after deduction of the offer price and costs. The amount of lapsed proceeds, if any, will not be known until the offer has closed. Lapsed proceeds are not guaranteed.