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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Stocks (NISM XXI-A)

In the context of equity investing, which of the following is the best description of a 'rights issue'?

A rights issue is an offer of new shares to existing shareholders in proportion to their current holdings, usually at a stated price. Unlike a bonus issue, shareholders must pay for the shares; it is also different from an IPO or a buyback.

  1. AAn offer of new shares to existing shareholders in proportion to their holdings, usually at a price specified by the companyCorrect
  2. BA free distribution of shares to existing shareholders out of reserves
  3. CAn offer of shares to the public for the first time by an unlisted company
  4. DA buyback of shares by the company from its shareholders

Explanation

A rights issue offers additional shares to existing shareholders in proportion to their holdings, typically at a discount, and shareholders must pay for them. A free distribution out of reserves is a bonus issue, a first public offer is an IPO, and a buyback reduces shares outstanding.

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