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Basics of Rights Issue

A Rights Issue of Shares is when a company offers its existing shareholders the right to buy additional shares, usually at a discounted price and in a fixed proportion to their current holdings.

Content:

  1. Rights Issue Meaning
  2. Types of Rights Issues
  3. Rights Issue Advantages
  4. Rights Issue Disadvantages
  5. Rights Issue Example
  6. Rights Issue Good or Bad

Rights Issue Meaning

In simple words, a rights issue gives you, as an existing shareholder, the first opportunity to buy more shares in the company before new investors — often at a price lower than the market rate.

It is your right, not an obligation, to subscribe. You can choose to invest, sell your entitlement, or ignore the offer.

Rights Issue Features

  • Offered only to existing shareholders
  • Shares issued at a discounted price
  • Based on a specific entitlement ratio (e.g., 1:2, 1:5)
  • Investors can subscribe, renounce (sell), or ignore their rights
  • Can be renounceable or non-renounceable (explained below)
  • Helps companies raise funds without increasing debt

Rights Issue Purpose

A company raises money through a rights issue to:

  • Expand operations or fund new projects
  • Reduce or repay existing debt
  • Strengthen working capital
  • Finance acquisitions or modernisation plans

In short, a rights issue allows a company to raise capital from current shareholders rather than outsiders, maintaining promoter and investor confidence.

Types of Rights Issues

Rights issues can be classified in different ways based on how shareholders make payment and whether the rights can be transferred. They are mainly categorised as follows:

A. Based on Payment Terms

When shareholders subscribe to a rights issue, they agree to follow the company’s payment schedule. Rights issues are generally offered in two payment modes:

  1. Full Payment at the Time of Application

In this type, shareholders pay the entire issue price upfront when applying for the rights shares.

Example:

Issue Price = ₹1.75 per share. The full ₹1.75 is payable at the time of application. So, if you apply for 100 shares, you must pay ₹175 immediately.

  1. Part Payment with Balance as Call Money

Sometimes, companies allow shareholders to pay in instalments. The first part (called application money) is paid at the time of application, and the remaining amount (called call money) is paid later when the company announces the due date.

The company must collect all outstanding call money within 12 months from the date of allotment.

Example: Issue Price = ₹8.50 per share

Pay ₹4.25 at application; balance ₹4.25 will be payable later as “call money” on a date fixed by the company’s board.

So, investors first pay half during application, and the remaining when the company notifies the payment date through the stock exchanges.

B. Based on Transferability of Rights

  1. Renounceable Rights Issue
  • Shareholders have the freedom to sell or transfer their rights entitlement to someone else.
  • This means if you don’t want to invest more, you can still benefit by selling your entitlement (known as Rights Entitlement or RE) in the stock market.
  • It gives flexibility to investors and allows the rights issue to reach new investors through trading.

Example:>If you receive 20 REs but don’t wish to apply, you can sell them on NSE/BSE during the RE trading period and earn some value instead of letting them lapse.

  1. Non-Renounceable Rights Issue
  • In this case, the rights cannot be transferred or sold.
  • You must either subscribe to the offer or ignore it — there’s no market for selling the entitlement.
  • Such issues are less flexible but sometimes used by smaller companies or for regulatory simplicity.

Rights Issue Advantages

  • Shares are offered at a discount to market price.
  • Allows investors to increase their stake and maintain ownership control.
  • Promoter participation often shows confidence in the company’s growth.
  • Faster and simpler than a public issue.
  • Cost-effective – no major underwriting or marketing expenses.
  • Shares are credited directly to your demat account.

Rights Issue Disadvantages

  • If you don’t apply, your ownership gets diluted when new shares are issued.
  • Companies in weak financial health might use rights issues just to survive, not to grow.
  • The issue may fail if investors lack trust or if market conditions are poor.
  • For partly paid shares, you may need to pay future call money later.
  • Short timelines — investors need to act quickly to subscribe or sell REs.

Rights Issue Example

Let’s say ABC Ltd. trades at ₹200 per share. It announces a rights issue of 1 share for every 4 held, at ₹150 per share. If you own 100 shares, you can buy 25 new shares for ₹150 each.
Even if the share price adjusts to ₹190 after the issue, you’ve still gained by buying at a discount — plus, you hold a larger stake in the company.

Rights Issue Good or Bad

A rights issue can be both good or bad, depending on why the company is raising funds and its financial health.

A rights issue is good when

  • The company is using funds for growth, expansion, or debt reduction.
  • Promoters participate fully, showing confidence.
  • The issue is priced reasonably and offers genuine value to shareholders.
  • The company has a solid track record and a transparent purpose for fundraising.

Result: Investors can benefit from long-term growth and acquire more shares at a lower price.

A rights issue is not beneficial when

  • The company is financially weak or raising funds just to repay old debt.
  • Promoters don’t participate, signalling low confidence.
  • Issue price is too close to the market price, giving little benefit.
  • The company has a history of frequent fund-raising, hinting at poor management.

Result: Investors may face dilution or value erosion if fundamentals remain weak.

Key Takeaways

  • A rights Issue of shares allows existing shareholders to buy additional shares, often at a discount.
  • It gives you a right, not an obligation, to invest further.
  • Rights issues can be renounceable (you can sell your entitlement) or non-renounceable.
  • They help companies raise capital efficiently while giving shareholders a fair chance to participate.
  • Always check the purpose, pricing, and promoter participation before deciding.
  • A well-planned rights issue can be a win–win for both the company and its investors.
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Frequently Asked Questions

A rights issue means the issue of shares to existing shareholders at a discounted price, in proportion to their current holdings.

It is a voluntary corporate action in which a company offers its existing shareholders the opportunity to buy additional shares — usually at a price lower than the current market price.

The number of shares offered is in proportion to the shares already held by each shareholder, as recorded in the company’s books on a specific date known as the record date.

Existing shareholders can:

  • Exercise their right to buy the shares,
  • Renounce or sell their rights entitlement to someone else (in case of a renounceable rights issue), or
  • Ignore the offer and let their rights lapse.
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The main purpose of a rights Issue is to help a company raise capital by offering additional shares to its existing shareholders at a discounted price. It strengthens the company’s finances while giving shareholders the first opportunity to invest further.

  • Fundraising for business growth – to finance expansion, new projects, technology upgrades, or acquisitions that support long-term development.
  • Debt reduction – to repay or reduce existing borrowings, lowering interest costs and improving the company’s financial health.
  • Strengthening the capital structure – to increase equity capital and reduce the debt-to-equity ratio, making the balance sheet stronger and more stable.
  • Preserving shareholder control – to allow existing shareholders to maintain their proportional ownership and prevent dilution by new investors.
  • Cost-effective fundraising – to raise capital faster and at a lower cost than public issues, loans, or private placements.
  • Building shareholder confidence – to signal management’s commitment to growth and a stronger financial future, thereby boosting investor trust.
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Eligibility for a Rights Issue is limited to shareholders whose names appear in the company’s shareholder register on the record date set by the company.

  • Existing shareholders on the record date – Only those who hold shares of the company as of the record date are eligible to receive the rights entitlement.
  • Renouncees (transferees of rights) – Shareholders who receive the rights can transfer (sell or gift) their entitlement to another person during the rights trading period. The recipient, known as the renouncee, then becomes eligible to apply for the rights shares.

Note: To subscribe and receive rights shares, the eligible shareholder or renouncee must have an active demat account where the newly allotted shares can be credited.

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A rights issue can be good or bad depending on the company’s purpose and financial health.
If the company raises funds for growth and communicates clearly with shareholders, it’s usually a good sign. But if it’s done to cover losses or repay old debts, it might not benefit investors.

Advantages of a Rights Issue

  • Buy at a discount: Opportunity to purchase additional shares below market price.
  • Increase stake: Allows investors to maintain or increase ownership in the company.
  • Profit from renunciation: Investors can sell their rights entitlement in the market if they don’t wish to subscribe.

Disadvantages of a Rights Issue

  • Dilution risk: Ownership may reduce if you don’t participate.
  • Potential drop in share value: Market price may fall after the issue.
  • Earnings impact: EPS may decrease due to more shares being issued.
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A rights issue is voluntary for shareholders. The company offers additional shares in proportion to the shares already held, but shareholders are not obliged to subscribe.

For renounceable rights issues (the most common type), shareholders can choose to:

  • Renounce their rights entitlement, and let someone else buy the shares.
  • Let the rights lapse without taking any action.
  • Purchase part of the entitlement and let the rest lapse.
  • Purchase the full entitlement offered to them.
  • Buy additional entitlement if the company allows oversubscription.
  • Purchase the entitlement and sell it (in full or in part) to another investor.

Note: Since it’s voluntary, investors have the flexibility to decide how much to invest or whether to participate at all. The above options apply only to renounceable rights issues. For non-renounceable rights, shareholders must either subscribe to the full entitlement offered or let it lapse.

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A rights issue is an optional offer of additional shares made to existing shareholders when a company wants to raise funds — usually for expansion, debt repayment, or working capital. These shares are offered at a discounted price for a limited period, giving existing shareholders the first opportunity to buy more before the public.

Here’s what typically happens:

  • Each existing shareholder receives a proportionate entitlement to buy additional shares (e.g., 1 new share for every 5 held).
  • Shareholders can subscribe fully, partly, sell (renounce), or let the offer lapse — since participation is voluntary.
  • If shareholders don’t subscribe, their rights expire after the issue closes.
  • The subscription period usually lasts between 16 to 30 days.
  • The company receives fresh capital once the shares are allotted.
  • After allotment, the market price adjusts to reflect the additional shares issued (known as price dilution).

In a rights issue, existing shareholders get preferential treatment — meaning they are prioritized over new investors for this offer.

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Rights Entitlement (RE) is a temporary tradable instrument issued to existing shareholders when a company announces a rights issue. It represents the right (but not the obligation) of shareholders to subscribe to additional shares at a discounted price offered by the company.

Shareholders receive these entitlements in proportion to their existing holdings.
For example: If a company announces a rights issue in the ratio of 2:5, it means shareholders can buy 2 new shares for every 5 shares they already hold.

Rights Entitlements are credited to shareholders’ demat accounts and can be traded on the stock exchange during the issue period, giving flexibility to those who may not wish to subscribe.

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In many cases, buying a rights issue can be a good opportunity — but it depends on the company’s financial health and your investment goals.

A rights issue has both advantages and disadvantages for shareholders.

It can be beneficial if you:

  • Want to buy more shares at a discounted price, usually below the market rate.
  • Believe in the company’s long-term growth and wish to maintain or increase your ownership.
  • Prefer to resell your Rights Entitlement (RE) in the market for a profit if you don’t want to apply.

However, it can be disadvantageous if you:

  • Are not confident about the company’s future performance or financial position.
  • Expect the share price to fall after the rights issue.
  • Think the earnings per share (EPS) may decline because of the increased number of shares.

In short, a rights issue is worth investing in when the company has strong fundamentals, a clear purpose for raising funds, and promoter participation — but it’s best avoided if it’s just a move to cover losses or repay old debts.

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