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IAI Actuarial Core Principles · Business Finance · Structure and methods of financing a company

A listed company offers its existing shareholders the right to buy new shares in proportion to their current holdings, at a price below the prevailing market price. What is the main reason for offering shares in this way?

A rights issue lets existing shareholders buy new shares in proportion to their holdings, so their percentage ownership and control are not diluted. It does not guarantee higher proceeds, avoid disclosure, change the share class, or exempt the new shares from dividends.

  1. AIt protects existing shareholders from dilution of their proportional ownership and controlCorrect
  2. BIt guarantees that the company raises more money than a public offer to new investors
  3. CIt removes the need for any prospectus or regulatory disclosure
  4. DIt converts the new shares into preference shares automatically
  5. It allows the company to avoid paying dividends on the new shares

Explanation

A rights issue gives existing shareholders the first opportunity to subscribe in proportion to their holdings. This preserves their percentage ownership and voting power. It does not guarantee more funds, does not remove disclosure duties, and the new shares rank as ordinary shares carrying dividends.

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