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ABC Ltd., decided to raise funds by issuing shares. the finance department felt that the company should offer the shares to existing shareholders on a pro-rata basis. Out of the following, identify the method of raising the funds being suggested by the finance department:
  • a)
    Public Issue
  • b)
    Right Issue
  • c)
    Private Placement
  • d)
    Offer to Employees
Correct answer is option 'B'. Can you explain this answer?
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Most Upvoted Answer
ABC Ltd., decided to raise funds by issuing shares. the finance depart...
Right Issue means to offer shares to the existing shareholders of the company in proportion to their existing share holding in the company for the purpose of raising fresh capital for the company. With these rights the shareholders of the company can purchase new shares at a discounted rate to the market price.
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ABC Ltd., decided to raise funds by issuing shares. the finance depart...
Method of raising funds: Right Issue

Explanation:
The method of raising funds being suggested by the finance department of ABC Ltd. is a Right Issue.

Definition:
A right issue is a method of raising additional capital by a company by offering its existing shareholders the right to purchase additional shares on a pro-rata basis. It allows existing shareholders to maintain their ownership percentage in the company by giving them the first opportunity to buy new shares before they are offered to the general public.

Features of a Right Issue:
- Offered to existing shareholders: A right issue is offered exclusively to the existing shareholders of the company.
- Pro-rata basis: The shares are offered to the existing shareholders on a pro-rata basis, meaning that the number of shares they can purchase is determined by their existing shareholding.
- Maintains ownership percentage: The purpose of a right issue is to allow existing shareholders to maintain their ownership percentage in the company. They have the opportunity to purchase new shares in proportion to their existing shareholding.
- Pre-emptive right: Existing shareholders have a pre-emptive right to purchase the new shares before they are offered to the general public.
- Cost-effective: A right issue is generally considered a cost-effective method of raising funds as it involves the issuance of shares to existing shareholders without the need for extensive marketing and underwriting.

Comparison with other methods:
- Public Issue: In a public issue, shares are offered to the general public rather than exclusively to existing shareholders. It involves marketing efforts and underwriting to attract new investors.
- Private Placement: In a private placement, shares are offered to selected investors such as institutional investors, private equity firms, or high net worth individuals. It is not offered to existing shareholders on a pro-rata basis.
- Offer to Employees: In an offer to employees, shares are offered to the company's employees at a discounted price. It is not offered to existing shareholders on a pro-rata basis.

Conclusion:
In this case, the finance department of ABC Ltd. is suggesting a right issue as the method of raising funds. This would involve offering the shares to existing shareholders on a pro-rata basis, allowing them to maintain their ownership percentage in the company.
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ABC Ltd., decided to raise funds by issuing shares. the finance department felt that the company should offer the shares to existing shareholders on a pro-rata basis. Out of the following, identify the method of raising the funds being suggested by the finance department:a)PublicIssueb)RightIssuec)PrivatePlacementd)OffertoEmployeesCorrect answer is option 'B'. Can you explain this answer?
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