rights offering
Rights Offering is when a company lets existing shareholders buy new shares, usually at a discount, before anyone else gets the chance.
In plain English
When a landlord wants to add a new floor to a building, he does not go knocking on strangers' doors for money. He goes first to the tenants already living there, the ones who have shown loyalty over the years, and offers them first chance to invest in the extension at a friendly rate.
A rights offering works the same way. When a company needs fresh capital, maybe to pay down debt or fund a new project, it can turn to the shareholders already on its register rather than strangers on the open market. Each shareholder gets the right to buy a certain number of new shares, in proportion to what they already hold, usually at a price lower than the current market price.
Say you own 1,000 shares in a Nigerian bank listed on the NGX, and the bank announces a rights issue of one new share for every five held, at ₦18 per share, when the market price is ₦25. You have the right to buy 200 new shares at that discount. You are not forced to. You can sell that right to someone else if you do not have the cash, or simply let it lapse.
This matters for a Nigerian in London sending money home to keep a family's shareholding active. If your mother holds shares in a company back home and a rights offering comes up, ignoring the letter from the registrar could mean missing a genuine discount, or watching your family's stake in the company shrink a little as new shares get issued to everyone else who did take part.
Companies like rights offerings because they raise money without diluting loyal shareholders unfairly, since those shareholders get first refusal. Shareholders like them because the discount rewards patience. It is one of the few times in investing where being early and being loyal actually pays you back in cash terms, more than in principle.
A company with shares trading at ₦25 offers existing holders one new share for every four held, at ₦20 each. A shareholder with 2,000 shares can buy 500 new shares at ₦20, spending ₦10,000 for shares worth ₦12,500 at market price, an instant ₦2,500 gain if the price holds.
Questions people ask
Do I have to take part in a rights offering?
No. Participation is optional. You can buy the new shares at the discounted price, sell your rights to someone else if the shares allow it, or do nothing and let the rights lapse, though your ownership percentage may shrink slightly if you skip it.
What happens if I ignore the rights offering letter?
Your shareholding does not disappear, but your percentage ownership of the company gets diluted because new shares are being created and other shareholders are buying them while you are not.
Why would a company choose a rights offering instead of just selling shares to the public?
It rewards existing shareholders with a discount, keeps ownership concentrated among people who already believe in the company, and is often cheaper and faster than a full public share sale.
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