What defines a rights issue?

A rights issue is characterized primarily by being an offer made exclusively to existing shareholders of a company. In a rights issue, existing shareholders are given the right, but not the obligation, to purchase additional shares at a specified price, usually at a discount to the current market price. This mechanism allows shareholders to maintain their proportional ownership in the company and to avoid dilution of their existing shares when new shares are issued.

The exclusivity of the offer is significant because it ensures that current shareholders have the opportunity to increase their stake in the company before any new investors are invited to purchase shares. This is especially important in maintaining shareholder loyalty and confidence.

In contrast, other options refer to scenarios that do not characterize the nature of a rights issue. For instance, being open to all investors pertains to public offerings, which allow any interested parties, including the public and institutional investors, to purchase shares. Similarly, a public offering does not limit ownership or purchasing rights based on existing shareholder status, and the focus is less about existing shareholders receiving preferential treatment. Lastly, limiting the rights issue to foreign investors would contradict the fundamental principle of a rights issue, which is to prioritize existing shareholders.