Normally, whenever an existing company makes a fresh issue of equity capital or convertible debentures the existing shareholders or convertible debenture holders have the first right to subscribe to the issue in proportion to their existing holdings. Only what is not subscribed to by the existing shareholders can be issued to the public. Thus, an issue offered to the existing shareholders or convertible debenture holders as their right is known as rights issue, as opposed to an issue open to the public at large, in which case we call it a public issue. An investor may exercise this right to subscribe to the offered issue, or he may sell the rights separately in the market. The rights have a market value only when the issue is made below the market value of the security. When this happens, as can be expected, the market price drops a little. The price of the security before the rights issue is known as the cum-rights price. The difference between the cum-rights and ex-rights price is a measure of the market value of a right, through increase in shares prices.
IS THE PRICE AT WHICH THE RIGHTS ARE ISSUED IMPORTANT:
The price at which a rights issue is made is irrelevant. In order to understand this, consider the example of a company, which has 100000 ordinary shares outstanding with a market price of Rs.40 per share. This is the cum-rights price. The total market value of the shares (also known as market capitalization) at this stage is Rs.4000000 (Rs.40 x 100000). … Read the rest