How A Rights Issue Works

Understanding how a rights issue works helps investors interpret announcements, track timelines, and anticipate what comes next — from the moment the company’s board decides to raise funds to the day new shares are listed and start trading.

Issue Process Simplified

At its core, a rights issue moves through a well-defined sequence of corporate and regulatory actions. In simple terms, the journey looks like this:

Board approval → SEBI filing → Record date → Dispatch of offer letter → RE credit → Application window → Allotment → Listing of new shares.

Each step connects smoothly to the next:

• Board Approval: The process begins when the company’s board of directors approves the proposal for a rights issue, specifying the size, ratio, and price of the offer.
• Filing with SEBI and Exchanges: The company files the draft Letter of Offer (LoF) with SEBI and the stock exchanges for review. This ensures compliance with disclosure and procedural norms.
• Record Date: The company announces a record date to identify eligible shareholders.
• Dispatch of Offer Letter: Once SEBI and exchanges grant approval, the company dispatches the Letter of Offer and application forms (electronically or physically) to eligible shareholders.
• Credit of REs: Rights Entitlements appear in shareholders’ demat accounts in proportion to their existing holdings.
• Application Window: Eligible investors can subscribe to the rights issue or renounce their REs during this period.
• Allotment and Credit: After the issue closes, shares are allotted, credited to demat accounts, and listed on the exchange for trading.

This straightforward flow helps investors visualise what happens between company board approval and final listing.

Key Regulatory Checkpoints

Several regulatory checks ensure transparency and investor protection throughout the rights issue lifecycle.

• Board and Shareholder Approvals: The company’s board must approve the issue, and in certain cases, shareholder approval through a special resolution is also required.
• SEBI Filing: The draft Letter of Offer (LoF) is filed with SEBI under the SEBI (Issue of Capital and Disclosure Requirements) Regulations. SEBI reviews disclosures related to pricing, objectives, and use of proceeds.
• Appointment of Intermediaries:
• Registrar to the Issue: Handles application processing, allotment, and reconciliation.
• Lead Manager (if applicable): Oversees compliance, documentation, and coordination with SEBI.
• Banker to the Issue: Manages collection of funds through ASBA and other permitted modes.
• Depositories’ Role (NSDL/CDSL): Create and credit Rights Entitlements (REs) into eligible demat accounts.
• Exchange Approval: BSE and NSE approve the trading of REs (where renunciation is permitted) and later the listing of new shares post-allotment.

These checks ensure that every step — from offer creation to allotment — follows SEBI’s investor protection framework.

Timelines and Investor Touchpoints

While the company, regulator, and exchanges manage much of the process, investors interact at critical stages. The following table summarizes the parallel flow between corporate actions and investor touchpoints:

Unsubscribed Shares and Board Discretion

If all shareholders do not subscribe to their entitlements, the company may receive undersubscription. The Board of Directors has the discretion to:

• Allot leftover shares to investors who applied for additional shares.
• Allot shares to renouncees or underwriters, depending on the structure and disclosures in the offer document.

This ensures the company can raise the intended amount while giving preference to existing shareholders who show higher interest.

Post-Issue Flow and Listing

Once the issue closes and allotment is finalised:

• Shares are credited to demat accounts within 5-10 days from issue closure.
• Trading of newly allotted shares generally begins on the stock exchange under the same ISIN as the company’s existing fully paid-up equity shares unless they are partly paid-up shares, in which case a separate ISIN is assigned until full payment is made, after which they are consolidated with the existing equity shares.
• The market price may adjust to reflect the expanded capital base and the issue price of new shares.

Companies typically issue a post-listing announcement to confirm completion, helping investors verify credit and trading commencement.

Key Takeaways

• A rights issue involves synchronised coordination between the company, SEBI, stock exchanges, depositories, and registrars.
• Board approval and SEBI filing mark the formal beginning of the process.
• Investors mainly engage during the RE credit and application window stages.
• Transparency and timing are critical — missing key dates can result in loss of entitlement.
• Understanding the workflow behind a rights issue helps investors act confidently and avoid last-minute confusion.