What is the difference between a rights issue and an IPO?

When a company needs to raise capital, it has several options, two of the most common being a rights issue and an initial public offer (IPO). While both involve issuing shares to raise funds, their purpose, process, and target investors differ significantly. Let’s look at the difference between rights issue and IPO explained in clear, simple terms.

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A rights issue is when a company offers additional shares to its existing shareholders. The idea is to give current investors the “right”, though not the obligation, to buy more shares at a discounted price before anyone else can. This approach rewards loyalty and ensures existing owners get the first chance to increase their holdings. The company benefits by raising capital without bringing in too many new investors or diluting existing ownership too much.

In contrast, an IPO (Initial Public Offer) is the very first time a company sells its shares to the general public. It’s how a private firm becomes publicly listed on a stock exchange. Unlike a rights issue, which targets existing shareholders, an IPO invites everyone, including new retail and institutional investors, to participate. The funds raised through an IPO are often used for expansion, debt repayment, or new projects.

Basically while doing the comparison between a rights issue vs IPO comparison, the biggest distinction lies in access and purpose. A rights issue is usually faster, less expensive, and doesn’t require as much regulatory scrutiny as an IPO. It’s a way for already listed companies to raise funds quickly without changing ownership significantly. On the other hand, an IPO involves extensive documentation, roadshows, and regulatory approval since it opens the door to the general investing public.

The major differences between rights issue and public offer to the public also are related to price and eligibility. In a rights issue, prices are set at a discount to attract participation, while in the case of IPOs, the prices are usually determined based on the demand discovered through the book building process. Rights issues are also a means of maintaining the existing shareholders' silence, whereas IPOs bring about liquidity and market visibility.
To summarize, the two instruments help the same way in the fundraising process for companies, yet they meet different strategic requirements.