Correct Option: D. Issue of shares to shareholders on favourable terms Explanation of the Correct Answer: A rights issue is a way for a company to raise additional capital by offering existing shareholders the opportunity to purchase additional shares at a discounted price, usually below the current market value. This is done to encourage existing shareholders to invest more in the company, thereby providing the company with the necessary funds for expansion, debt reduction, or other financial needs.

1. Favourable Terms: The term "favourable terms" refers to the fact that the shares are offered at a price lower than the market price. This incentivizes shareholders to buy more shares, as they can acquire them at a bargain compared to the current trading price.
2. Shareholder Priority: Rights issues are typically offered to existing shareholders first, giving them the right to maintain their proportional ownership in the company. If they choose not to participate, they may dilute their ownership percentage as new shares are issued to other investors.
3. Process: When a rights issue is announced, shareholders receive a certain number of rights for each share they own. For example, a company might offer one new share for every five shares held. Shareholders can then exercise these rights to buy the new shares at the specified price within a set time frame.

Why the Other Options are Incorrect:

• Option A: Issue of shares to the directors of a company on favourable terms
• This option is incorrect because a rights issue is not limited to directors; it is specifically aimed at existing shareholders. While directors may participate in a rights issue if they are shareholders, the term does not refer to shares being issued solely to them.
• Option B: Issue of shares by a company only to the founders of the company
• This option is also incorrect. A rights issue is not restricted to founders; it is available to all existing shareholders. Founders may be included if they hold shares, but the rights issue is not exclusive to them.
• Option C: Right of shareholders to vote on any issue
• This option is misleading. While shareholders do have voting rights on various corporate matters, a rights issue specifically pertains to the issuance of new shares and the opportunity for existing shareholders to purchase them. Voting rights are a separate aspect of shareholder privileges and do not define a rights issue.

Summary of Key Points:

• A rights issue allows existing shareholders to buy additional shares at a discounted price, helping the company raise capital.
• It is designed to maintain shareholder ownership proportions and prevent dilution.
• The term "favourable terms" indicates that shares are offered at a price lower than the market value.
• Rights issues are not limited to directors or founders; they are available to all existing shareholders.

This understanding of rights issues is crucial for anyone studying commerce, as it highlights the mechanisms companies use to finance their operations while considering the interests of their shareholders.