A company can raise capital from its existing shareholders by issuing them the rights to buy new equity shares in proportion of their existing shareholding percentage. It can be also provided that the existing shareholders can transfer right to the other individuals who are outsiders.
When is rights issue carried out? When the existing shareholders of the company believe in the growth story of the company and also when they have additional personal funds with them for investment in the company. Right issue results equity funding with the ownership of the same set of people as before and no involvement of new entities. Rights issue is undertaken if if the existing group of owners of a company do not want to include third party new investor and also have sufficient capital who raise required money.