This article throws light upon the four main factors responsible for success of right issue. The factors are: 1. Condition of Investment Market 2. Effect of Rights Issue on Earning per Share 3. Size of Rights Issue 4. Pricing of the Rights Issue.
Success of Right Issue: Factor # 1.
Condition of Investment Market:
It is primarily the attraction of the shares offered as an investment which influences the success of the rights but condition of the investment market also considerably affects the success. Favourable conditions of the investment market, generally, ensure the success of rights issue while unfavourable investment market conditions affect the success adversely.
Success of Right Issue: Factor # 2.
Effect of Rights Issue on Earning per Share:
The new investment takes some time before it bears fruits and during this period the existing earnings are distributed over a large number of shares and this brings down the earnings per share, which in turn brings down the market price of share.
Sometimes market price comes so much down that it is even below the price offered for rights shares. In such cases, no one would like to exercise his right and the right issue becomes a failure, hence the management should be very cautious and should keep in mind the effect of further issue of shares on the earnings per share.
Success of Right Issue: Factor # 3.
Size of Rights Issue:
Another important factor which influences the success of an issue is the size of the rights issue. Smaller the issue in relation to existing share capital, the more likely is the success of the issue. However, there is no acid test to decide the size of the new issue. But the golden rule is that the earning power of the company should be in proportion to the issued share capital.
It is easy to succeed when one share is offered against every four shares held than when two shares are offered against every five shares held in the company. This is so because new investment takes time before it brings fruits and during this period the existing earnings are spread over a larger number of shares which brings down the earnings per share.
When size of the issue is large in proportion to the issued share capital, there are more chances that market price may come down to such a level that it is below even the price offered for rights shares. Hence, it is advisable that the company should offer rights shares in small size in proportion to its equity capital and if the company has plans for large expansion, it may be carried out in stages.
Success of Right Issue: Factor # 4.
Pricing of the Rights Issue:
The price at which the right shares are offered also influences to a very large extent the success of rights issue. The management has to be very careful while deciding the price to be offered to the shareholders for purchasing further shares in the company.
The issue price should be determined keeping in mind the condition of the investment market, the market trend of share prices in general and of the company’s shares in particular, the size of the issue, earning capacity of the company, past dividend record and the effect of the issue on earnings per share.
Generally, the price offered for the right shares is lower than the market price of the shares of the company. This is so for two reasons-^ to enable shareholders to benefit from the fresh issue and (ii) to ensure that the right is exercised and even if the market price of the shares falls, it does not go below the price offered for the right shares, so the issue becomes a success.