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 money into the company, thereby providing it with the necessary funds for expansion, debt repayment, 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 Rights: The rights issue is specifically aimed at existing shareholders, giving them the "right" to purchase additional shares in proportion to their existing holdings. This helps maintain their ownership percentage in the company and prevents dilution of their shares.
3. Process: When a rights issue is announced, shareholders receive a rights certificate that allows them to buy a certain number of shares at the specified price within a set time frame. If they choose not to exercise their rights, they can often sell these rights to other investors.

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 for existing shareholders. While directors may participate in a rights issue if they are shareholders, the definition does not pertain to them exclusively or to any special terms just for 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. This option misrepresents the nature of a rights issue, which is inclusive of all shareholders rather than a select group.
• 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 refers to the opportunity to purchase additional shares, not to vote on issues. Voting rights are a separate aspect of shareholder privileges.

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 percentages and prevent dilution.
• The term "favourable terms" indicates that shares are offered below market value to incentivize purchase.
• Rights issues are not exclusive to directors or founders and do not pertain to voting rights.

Revision Summary:

• A rights issue is an offer to existing shareholders to buy more shares at a discount.
• It helps companies raise capital while allowing shareholders to maintain their ownership percentage.
• The term "favourable terms" refers to the discounted price of the shares.
• Rights issues are inclusive of all shareholders, not just directors or founders.