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When doing a Secondary Market Offering of shares to raise money, a company can opt to do a rights issue to raise equity. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified attractive price within a specified time.A rights issue is offered to all existing shareholders individually and may be rejected, accepted in full or (in a typical rights issue) accepted in part by each shareholder.

Rights can be renounceable(can be sold separately from the share to other investors during the life of the right) or non-renounceable (shareholders must either take up the rights or let them lapse. Once the rights have lapsed, they no longer exist).

To issue rights the financial manager has to consider:

• Subscription price per new share
• number of new shares to be sold
• the value of rights
• the effect of rights on the value of the current share
• the effect of rights to existing and new shareholders

A right to a share, generally issued on ratio basis( e.g one-for-three rights issue). Because the company is getting the shareholders' money in exchange for issuing rights, a rights issue is a source of funds for the company issuing it.

Rights issues may be underwritten. The role of the underwriter is to guarantee that the funds sought by the company will be raised. The agreement between the underwriter and the company is set out in a formal underwriting agreement. Typical terms of an underwriting require the underwriter to subscribe for any shares offered but not taken up by shareholders. The underwriting agreement will normally enable the underwriter to terminate its obligations in defined circumstances. A sub-underwriter in turn sub-underwrites some or all of the obligations of the main underwriter; the underwriter passes its risk to the sub-underwriter by requiring the sub-underwriter to subscribe for or purchase a portion of the shares for which the underwriter is obliged to subscribe in the event of a shortfall. Underwriters and sub-underwriters may be financial institutions, stock-brokers, major shareholders of the company or other related or unrelated parties. The Panel’s guidance covers both non-underwritten and underwritten rights issues.

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