A rights issue is a method for a company to raise fresh capital. Instead of going public, the company approaches its existing shareholders, offering them the option to subscribe to additional shares in proportion to their current holdings. Essentially, it’s like an IPO but exclusive to the company’s shareholders.

For example, a 1:4 rights issue means that for every 4 shares held, the shareholder has the right to purchase 1 additional share.

Unlike bonus shares, a rights issue requires shareholders to pay for the new shares. However, the price offered is typically lower than the current market price, making it an attractive proposition compared to buying shares directly from the open market.

Shareholders are likely to participate if they are confident about the company’s future prospects. A rights issue often reflects management’s optimism about the company’s growth potential.