Rights Entitlement (RE) Trading and Strategy
A rights Issue offers existing shareholders the opportunity to buy additional shares—usually at a discounted price.
A rights Issue offers existing shareholders the opportunity to buy additional shares—usually at a discounted price.
Content:
Since 2019, SEBI has allowed these Rights Entitlements (REs) to be traded on stock exchanges, giving investors the flexibility to apply, buy more, or sell (renounce) their rights.
Trading these temporary instruments creates opportunities—but also requires understanding pricing, timelines, taxation, and strategy. This chapter explains how Rights Entitlement trading works, how RE prices are determined, how to decide between applying versus selling, what “renunciation” means, and how to use REs strategically.
REs are a temporary credit in your demat account showing how many rights shares you may apply for. REs are not the actual right issue shares.
REs appear under a separate ISIN, such as ABC-RE. They have an expiry—once the issue closes, unexercised REs lapse and have no value.
Though the terms may sound similar, they refer to two different concepts in a rights issue:
Rights Entitlement Trading refers to buying or selling REs during the trading window.
RE trading is also called Renunciation of Rights Entitlement, meaning a shareholder is giving up (renouncing) some or all of their rights in favor of someone else.
Types of Renunciation
RE trading gives flexibility to both sides:
For shareholders who do not wish to apply - They can sell their REs and earn value instead of letting them lapse.
For investors who want more than their entitlement - They can buy REs from the market and apply for more shares.
RE trading thus ensures that rights issues are more inclusive and efficient.
REs can be traded in two ways:
(A) On-Market Trading
This is the most common method of RE trading also known as on-market renunciation. REs trade on the stock exchange similar to shares, but with certain restrictions.
Key points:
(B) Off-Market Renunciation
This is less common and used when the transfer happens privately.
Features:
Before deciding whether to apply for rights shares or sell your Rights Entitlement (RE), many investors first estimate the fair value of the RE. This helps them understand whether the market price of the RE is attractive or overpriced.
(i) Determining the Value of the RE
A commonly used method is calculating the Risk-Adjusted Share Price (RASP) — the theoretical price of the share after the rights issue — and then deriving the intrinsic value of the RE.
Example: Calculating Theoretical Value of RE
Formula for RASP = (Value of existing shares + Value of rights shares) ÷ Total shares after issue = (600×210 + 66×150) / 666= ₹204
Fair value of RE = RASP – Rights issue price = 204 – 150 = ₹54
Thus, the theoretical value of each RE = ₹54
This gives investors a benchmark to compare against the actual trading price of the RE.
(ii) Compare Fair Value With Actual Market Price
Once you know the fair value, compare it with the RE’s live market price:
This comparison helps investors make a quick, logical decision.
(iii) If You Do Not Plan to Apply — Selling is the Best Option
Even if you don't want to participate in the rights issue:
✔ Always sell the RE instead of letting it lapse.
✔ RE has monetary value during the trading window.
✔ Letting it expire means you lose that value completely.
Selling ensures you recover some value, whereas doing nothing results in zero.
While the theoretical value of the Rights Entitlement (RE) and its market price are important indicators, pricing should never be the sole deciding factor. Investors must also assess the fundamentals and future prospects of the company offering the rights issue.
Before deciding whether to apply for rights shares or sell the RE, consider:
A rights issue can be a positive opportunity if the company is raising funds for growth or strengthening its balance sheet. However, if the rights issue is driven by financial stress, applying—even at a discount—may not be wise.
To buy additional rights entitlement from the market, investors can login to their broker trading platform and buy REs online during the trading period and then apply for all REs they hold.
Important to note:
Selling Rights Entitlement is very similar to selling normal shares, but it is time-bound and strictly delivery-only (No intraday).
Steps to sell REs on-market:
The taxation of Rights Entitlements (REs) is quite simple. When you sell an RE on the market, the profit is treated as a capital gain, since REs are considered a capital asset. Because REs are credited to you at no cost, the cost of acquisition is treated as NIL, meaning the entire selling price becomes taxable. REs typically exist only for a short window, so any gains are usually short-term capital gains (STCG).
If you decide not to sell or apply, the RE simply lapses—this has no tax impact, and you cannot claim a capital loss. When you choose to apply and receive rights shares, the tax rules apply only at the time of selling those shares in the future. The cost of acquisition for such shares becomes the amount you actually paid in the rights issue, and the holding period starts from the date of allotment.
|
Scenario |
Tax Treatment |
|
Selling REs |
Taxed on entire sale value as STCG |
|
REs Lapse (Not sold / Not applied) |
No tax impact. Cannot claim capital loss for lapsed REs |
|
Applying for Rights Shares |
Tax applies as STCG or LTCG depending on holding period only when shares. (Selling amount - amount paid to acquire rights) |
Once you decide to apply, sell, or buy REs, the next step is understanding what happens after the application — allotment, share credit, and listing. The next chapter explains the full post-application flow in a simple and clear manner.
Renunciation of Rights Entitlements (REs) means selling or transferring your REs to another investor instead of applying for the rights shares yourself. When a rights issue is renounceable, shareholders can trade their REs on the stock exchange or transfer them off-market.
By renouncing, you give up your right to subscribe and allow someone else to apply for the rights shares, while you receive the sale value of the REs. If you do not renounce or apply before the deadline, the REs will simply lapse and become worthless.
Rights Entitlement (RE) is a temporary credit received in your demat account when a company announces a rights issue. It gives you the right—but not the obligation—to apply for new shares.
Below are the simple steps that explain the working of RE.
Once Rights Entitlements (REs) are credited to your demat account, you have three practical options:
Note : If you do not opt for any of the above, the REs will expire after the issue closes and become worthless.
Yes, you can sell Rights Entitlements (REs) if the rights issue is renounceable. REs are tradable on the stock exchange for a limited period specified in the Letter of Offer.
If you do not wish to apply for the rights issue, you can sell (renounce) your REs just like normal shares, though trading is delivery-only and intraday trading is not allowed. The sale must be completed within the RE trading window; otherwise, the entitlements will lapse and become worthless.
In most cases, selling REs is better than taking no action, as it allows you to realise value instead of letting the entitlement expire.