Definition:
A Rights Issue is a method by which a company raises additional capital by offering new shares to its existing shareholders at a discounted price. Shareholders receive the right, but not the obligation, to buy these shares in proportion to their existing holdings before they are offered to the public.
Since only existing shareholders are eligible initially, a rights issue helps companies raise funds while giving current investors an opportunity to maintain their ownership percentage.
How Does a Rights Issue Work?
A company announcing a rights issue specifies:
The number of new shares being offered.
The subscription price (usually below the current market price).
The ratio of entitlement (e.g., 1:5 or 2:7).
The last date to exercise the rights.
For example, if a company announces a 1:4 rights issue, a shareholder owning 400 shares can buy 100 additional shares at the rights issue price.
If the shareholder does not subscribe, their ownership percentage may decrease after the new shares are issued.
What Can Shareholders Do?
Option | What Happens? |
Subscribe | Buy the shares offered to you. |
Apply for additional shares | Request more than your entitlement. Extra shares are allotted only if available. |
Sell your Rights Entitlement (RE) | Transfer your entitlement to another investor through the stock exchange. |
Ignore it | Your RE expires and your ownership percentage may be diluted. |
Rules Around Rights Issues in India
1. Existing Shareholders Get First Preference
Rights shares must first be offered to existing shareholders in proportion to their current holdings, helping protect them from immediate ownership dilution.
2. Rights Are Not Compulsory
Receiving a rights offer does not obligate you to invest. It is a choice, not a requirement.
3. Rights Entitlements Can Usually Be Traded
If the issue is renounceable, shareholders may sell or transfer their Rights Entitlement (RE) during the trading window instead of subscribing.
4. Additional Shares Can Be Requested
Investors may apply for more shares than their entitlement. If some shareholders do not subscribe, the company may allot the remaining shares to eligible applicants, subject to the issue terms.
5. Rights Issues Have a Fixed Subscription Period
The company announces an opening and closing date. Applications submitted after the closing date are not accepted.
6. Rights Entitlements Expire
If you neither subscribe nor sell your RE before the deadline, it lapses and becomes worthless.
7. The Issue Price Is Usually Discounted
Rights shares are generally offered below the prevailing market price to encourage shareholder participation, although there is no fixed discount percentage required by law.
8. Companies Must Disclose the Purpose of the Fund Raise
The offer document must explain:
Why the money is being raised.
How the proceeds will be used.
Key risks associated with the issue.
Investor Tip
A rights issue should never be judged only by its discounted price. Before subscribing, check why the company is raising capital. A rights issue funding expansion or debt reduction is generally viewed more positively than one intended to cover recurring losses or cash flow problems.
Definition:
A Rights Issue is a method by which a company raises additional capital by offering new shares to its existing shareholders at a discounted price. Shareholders receive the right, but not the obligation, to buy these shares in proportion to their existing holdings before they are offered to the public.
Since only existing shareholders are eligible initially, a rights issue helps companies raise funds while giving current investors an opportunity to maintain their ownership percentage.
How Does a Rights Issue Work?
A company announcing a rights issue specifies:
The number of new shares being offered.
The subscription price (usually below the current market price).
The ratio of entitlement (e.g., 1:5 or 2:7).
The last date to exercise the rights.
For example, if a company announces a 1:4 rights issue, a shareholder owning 400 shares can buy 100 additional shares at the rights issue price.
If the shareholder does not subscribe, their ownership percentage may decrease after the new shares are issued.
What Can Shareholders Do?
Option | What Happens? |
Subscribe | Buy the shares offered to you. |
Apply for additional shares | Request more than your entitlement. Extra shares are allotted only if available. |
Sell your Rights Entitlement (RE) | Transfer your entitlement to another investor through the stock exchange. |
Ignore it | Your RE expires and your ownership percentage may be diluted. |
Rules Around Rights Issues in India
1. Existing Shareholders Get First Preference
Rights shares must first be offered to existing shareholders in proportion to their current holdings, helping protect them from immediate ownership dilution.
2. Rights Are Not Compulsory
Receiving a rights offer does not obligate you to invest. It is a choice, not a requirement.
3. Rights Entitlements Can Usually Be Traded
If the issue is renounceable, shareholders may sell or transfer their Rights Entitlement (RE) during the trading window instead of subscribing.
4. Additional Shares Can Be Requested
Investors may apply for more shares than their entitlement. If some shareholders do not subscribe, the company may allot the remaining shares to eligible applicants, subject to the issue terms.
5. Rights Issues Have a Fixed Subscription Period
The company announces an opening and closing date. Applications submitted after the closing date are not accepted.
6. Rights Entitlements Expire
If you neither subscribe nor sell your RE before the deadline, it lapses and becomes worthless.
7. The Issue Price Is Usually Discounted
Rights shares are generally offered below the prevailing market price to encourage shareholder participation, although there is no fixed discount percentage required by law.
8. Companies Must Disclose the Purpose of the Fund Raise
The offer document must explain:
Why the money is being raised.
How the proceeds will be used.
Key risks associated with the issue.
Investor Tip
A rights issue should never be judged only by its discounted price. Before subscribing, check why the company is raising capital. A rights issue funding expansion or debt reduction is generally viewed more positively than one intended to cover recurring losses or cash flow problems.