Reason for Right Issue

The Logic behind the Right Issue is as follows:

The Roots of Right Issue came from the ancient tradition:
In Earlier times Businessmen reward to their Customers for their Loyalty and offer some Discount as a Reward.
After the "Company" word came into existence, the Tradition gets extended to the Shareholders of the Company also.

Promoter/Director offers the Shareholder of the company, Shares at the Right basis. In case of Right shares Promoter/Director offers the Shareholders shares at the Lower price than the Actual Market Price.
So, Shareholder can get benefited and stick to the Company for further Invetment in Future.

In case of Public Companies they have vey wide No. of the Shareholders, But The private Companies have very less No. of Shareholders.

With the Passage of the Time, Any company's share value will increase in the Future and At that time, By way of the Right shares Public Company can offer the Reward to the Shareholders and Offers the Right of Renunciation also.

The Reason behind the Right of Renunciation is as follows: If the shareholder doesn't have the enough money to purchase the Shares, at that time, he can give away his "Right" to third party & can earn some income by doing that.

Almost 99% of the Private Companies sell their shares at Face value & not at the Market Value.

Because Promoter/Directors understand the Private Company as a medium to Limit the Liability & get the maximum benefit from It.

So, If the Right shares Option will be given to Private Companies, they will not apply that Rule In their company because after the application of the Option also the Right share Price will be higher than the Face Value.

So, Legislator doesn't provide the Right share Option to the Private Companies.

The largest Right Issue Offer provided by the SBI is as follows:

Market Value: Rs. 2500 Per Share

Right Share Value: Rs. 1250 Per Share

Face Value: Rs. 10 Per Share.

Now, You can Understand that the Right Share option is very fruitful to the Existing Shareholder.

Tata Consultancy Service has come out with Right Issue in 2005 also, Which was one of the Most subscribed Right Issue.

If You, Still need to understand the Concept in Details, then Let me Know, I will do that for You.