What is the primary purpose of a subscription right?

The primary purpose of a subscription right is to maintain proportional ownership in a company. When a company issues new shares, existing shareholders are often given subscription rights, also known as preemptive rights, which allow them to purchase additional shares before the new shares are offered to other potential investors. This mechanism ensures that existing shareholders can maintain their ownership percentage and prevent dilution of their voting power and economic interest in the company.

By exercising their subscription rights, shareholders can buy newly issued shares at a predetermined price, often below the current market value, thus allowing them to preserve their investment's value and influence in the company's future performance. This is particularly crucial when a company is looking to raise capital or expand, as it keeps the existing ownership structure intact and rewards loyal investors with the opportunity to increase their stake.

Understanding this aspect of subscription rights highlights the importance of shareholder equity and the strategic considerations involved in corporate financing and governance.