When capital is raised through a rights issue, existing shareholders are given the right to buy more shares, in proportion to the amount they already own, and often at a discounted price.
There is usually a maximum amount of shares you will have the opportunity to buy, for example one more for every five you own. You don’t have to buy the full amount, though, or any if you choose not to take part.
A key issue with such capital raises is “dilution” – the decrease of an existing shareholder’s percentage ownership in a company. Only in the rare case that all shareholders choose to participate fully in a rights issue, will they all end up retaining the same percentage holding of the company and there will be no dilution – albeit at their own extra expense.
Shareholders can chose to participate in part or not at all. Those who don’t participate will have their percentage holding of the company diluted if the rights issue is successfully completed.
There are two types of rights issues: renounceable and non-renounceable. Renounceable means that, instead of utilising your rights, you can sell them to someone else, who will then be able to purchase your share entitlement. Rights are sometimes listed on the NZX and can be sold like ordinary shares. Non-renounceable means that the right is not transferable, and therefore cannot be sold.