How to Answer “What is a rights offering, and how does it work for existing shareholders?” in Investment Banking Interviews
In rights offering investment banking interviews, you’ll often be asked: “What is a rights offering, and how does it work for existing shareholders?” A strong answer shows you understand the equity issuance mechanics and can explain the shareholder choices (subscribe, sell, or do nothing) clearly.
At analyst level, keep it structured: define the instrument, walk through the process for existing holders, and end with the key implications—dilution, pricing/TERP, and underwriting risk.
What Interviewers Test with Rights Offerings in IB
Interviewers use this as a proxy for how well you handle investment banking technical questions that sit between textbook definition and real deal execution. They want to hear the mechanics (rights ratio, subscription price, record date, trading/renunciation, oversubscription, backstop) explained cleanly.
They’re also testing judgement: when a company would choose a rights issue (often to raise equity while protecting existing holders), and what it signals (e.g., balance sheet repair vs growth capital). You should be able to discuss pros/cons relative to a marketed follow-on or private placement.
Finally, they’re checking whether you can quantify the impact on shareholders—especially dilution and how “value transfer” is avoided in theory via TERP—and communicate it in a way a client (or senior banker) could reuse.
How Rights Offerings Work: Analyst Answer Framework
- 1
Step 1: Define the rights offering and the purpose
Start with a one-sentence definition, then add the “why now.” A rights offering is an equity issuance where existing shareholders receive rights (options) to buy new shares, usually at a discount to the current market price, in proportion to their current ownership. The goal is to raise primary capital while giving current owners the first chance to maintain their percentage stake.
Add context that makes it sound like investment banking interview prep, not a dictionary: rights issues are common when a company needs equity quickly but wants to be fair to existing holders, or when market conditions make a fully marketed offering harder. Mention that rights can be renounceable (tradable) or non-renounceable (cannot be sold), which changes the shareholder experience and execution risk.
- 2
Step 2: Explain how rights offerings work for existing shareholders
Walk through the rights offering process for existing shareholders as a timeline with choices. On the record date, shareholders receive rights based on a ratio (e.g., 1 new share for every 4 owned). The company sets a subscription price (discounted). During the subscription period, holders can:
- Exercise (subscribe): pay cash and buy the new shares; this typically preserves ownership percentage.
- Sell the rights (if renounceable): monetise the value of the discount without putting in new cash.
- Do nothing: let rights expire; they lose the right’s value and will be diluted if others subscribe.
If there’s an oversubscription privilege, shareholders who exercise may request extra shares not taken up by others. In a banked deal, an underwriter/backstop may agree to buy any unsubscribed shares, reducing execution risk but increasing fees.
- 3
Step 3: Quantify pricing mechanics (TERP) and dilution
To show you understand how rights offerings work, briefly introduce TERP (theoretical ex-rights price) and why the discount doesn’t automatically “create value.” TERP is the weighted average price after the new shares are issued:
- TERP = (Old shares × old price + New shares × subscription price) / Total shares after issue
Then link it back to shareholder outcomes: if a holder subscribes, their percentage ownership is roughly maintained; if they don’t, they are diluted because the share count increases. In a renounceable issue, a non-subscriber can often mitigate economic loss by selling the rights; in a non-renounceable issue, they may be worse off if they don’t participate.
Also mention practical nuances: rights trading can move with the stock; real prices can deviate from TERP; and fees/underwriting/backstop terms affect net proceeds and signalling.
- 4
Step 4: Add deal-reality considerations (underwriting, signalling, alternatives)
Close the framework with execution and “why this method” versus alternatives—this is what makes the answer interview-ready. A shareholder rights offering is often seen as more equitable than a discounted private placement because existing holders are offered the same terms. But it can be slower/more complex operationally (prospectus/permissions depending on jurisdiction, shareholder communication, trading mechanics).
Cover underwriting choices: a fully underwritten rights issue provides certainty of funds but costs more; an unwritten/best-efforts structure has lower fees but higher risk of shortfall. Mention signalling: rights issues can be interpreted as balance sheet stress (e.g., deleveraging) unless clearly tied to an accretive use of proceeds.
If time allows, compare to a follow-on offering: marketed deals can be faster and simpler for investors, but can be more dilutive for existing holders if they’re not allocated meaningfully.
Rights Offering Investment Banking: Sample Answer
A rights offering is an equity raise where a company gives existing shareholders rights—essentially short-dated options—to buy new shares, usually at a discount, in proportion to what they already own. It’s designed to raise primary capital while giving current owners the first chance to maintain their ownership percentage.
Mechanically, shareholders on the record date receive a set number of rights based on a ratio, like one new share for every four shares held. During the subscription period, an existing shareholder has three basic choices: they can exercise the rights and pay the subscription price to buy the new shares; they can sell the rights if the issue is renounceable and monetise the value of the discount without investing more cash; or they can do nothing, in which case the rights expire and they’ll be diluted when the share count increases.
From a pricing perspective, you can think about the theoretical ex-rights price, or TERP, which is the weighted average of the old shares at the current price and the new shares at the subscription price. In theory that means the discount doesn’t create free value—value is just reallocated between the share price and the rights. Finally, many rights issues are backstopped or underwritten so the company has certainty of proceeds, but that increases fees and can carry signalling implications depending on why the capital is being raised.
- Lead with a definition that includes “existing shareholders” and “pro-rata” to show fairness mechanics.
- Name the three shareholder actions (subscribe/sell/do nothing) and tie each to dilution and cash impact.
- Use TERP as a quick pricing sanity check; don’t get lost in algebra.
- Mention renounceable vs non-renounceable—an easy way to differentiate candidates.
- Acknowledge underwriting/backstop as an execution lever and source of fees/risk.
Common Pitfalls in Investment Banking Technical Questions
- Describing a rights offering as “free shares” rather than rights to buy shares at a set subscription price.
- Forgetting to explain what happens if a shareholder does not participate (dilution and potential loss of rights value).
- Skipping renounceable vs non-renounceable rights, which changes whether holders can sell the rights.
- Over-indexing on formulas without explaining the intuition of TERP and why the discount isn’t automatic value creation.
- Ignoring underwriting/backstop mechanics and treating it like a generic follow-on offering.
- Not connecting the structure to *why* a company chooses it (fairness to holders, certainty of funds, signalling).
Follow-Ups on Shareholder Rights Offering Mechanics
What’s the difference between a renounceable and non-renounceable rights issue?
Renounceable rights can be traded/sold, so shareholders can monetise value if they don’t want to subscribe; non-renounceable rights can’t be sold, so non-participants are typically worse off.
How do you calculate TERP in a rights offering?
TERP is the weighted average price after issuance: (old shares × current price + new shares × subscription price) divided by total shares post-issue.
Why would a company choose a rights offering instead of a marketed follow-on?
It can be viewed as fairer to existing holders because it’s pro-rata, and it may improve deal certainty if backstopped; a marketed follow-on can be simpler but may dilute existing holders more if they’re not allocated.
What happens to ownership if a shareholder subscribes vs doesn’t subscribe?
If they subscribe pro-rata, they roughly maintain ownership; if they don’t, their percentage ownership is diluted because total shares outstanding increases.
What does it mean for a rights issue to be underwritten or backstopped?
An underwriter/backstop agrees to purchase any unsubscribed shares, giving the company certainty of proceeds in exchange for fees and risk transfer.
Investment Banking Interview Prep: Practise and Improve Fast
- Deliver a 90-second version first: definition → shareholder choices → dilution/TERP → underwriting mention.
- Practise one simple numeric example (e.g., 4-for-1 at a discount) so you can explain dilution and TERP without hesitating.
- Record yourself answering and check that you explicitly say what existing shareholders can do (subscribe, sell rights, or let them lapse).
- In mock runs on AceTheRound, ask for follow-ups on renounceability, underwriting, and comparison to follow-ons to build depth without rambling.
Ready to practice with AceTheRound?
Create an account to unlock AI mock interviews, feedback, and the full prep library.