Right issue is simply defined as right to buy something first, the right to decide whether or not to buy something before it is offered to other potential buyers. In the term of financial management, right issue is related to the business’s strategy to financing their business. We know that there are several ways for the company to get the money to operate their business. Issuing stock through IPO, borrowing to the financial institution, and own equity are several ways we meant.
As the definition above, right issue means right given by company to the current stockholders whether or not to buy new stock issued before it is offered to other potential buyers. The objective is keeping the percentage of possession by stockholder, besides reducing the cost of issuing new stock.
This kind of corporate action makes duty or consequence for the company. Company must maintaining and keeping the stock profitability to its stockholders. The stock must give profit both dividend and capital gain to the outstanding stockholders. Company has to show its best performance by its financial report and create good corporate action in the market. If the stock is profitable, stockholders will apply the proposal from the management to issuing right issue, buying the new stock, or give not too bad reaction for the stock price volatility.
Right issue is relatively negative signal for the market. Why? Because existing stockholder often ask or being offered lower price than current market price, so the market price is going down.
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