Rights issue
Also written Rights shares · Rights entitlement · RE
An offer of new shares at a set price to existing shareholders in a fixed ratio to what they already hold, so that their proportionate stake is not diluted when the company raises fresh capital.
In plain language
When a company issues new shares to strangers, everyone already on the register owns a smaller slice of the same company. The workbook's arithmetic is blunt: a company with 10 lakh shares that issues another 10 lakh has halved every existing holder's proportion. That is dilution.
The Companies Act's answer is that a company wanting more capital through an issue of shares must offer it to its existing shareholders first. That offer is a rights issue.
It is called a "right" because it is precisely that — an entitlement, not an obligation. You can take it up, you can let it lapse, or you can sell it to somebody else. What you cannot be is quietly diluted without being asked.
How it works
The board fixes a ratio — 1:1 to double the capital, or 1:2, 2:3, 2:5, whatever it chooses. A listed company fixes a record date to determine who is eligible, files a draft letter of offer with SEBI, and dispatches an abridged letter of offer to all investors before the issue opens. An investor who never receives the form may apply on plain paper.
The issue must stay open not less than 7 days and not more than 30 days (SEBI (ICDR) (Amendment) Regulations, 2022, with effect from 14 January 2022).
The process has been substantially modernised. Rights entitlements are credited to the investor's demat account, the letter of offer and entitlement form may be delivered by email to investors who have registered their email with their DP or RTA, and all payments must be made through ASBA.
The part that generates exam questions is renunciation. An entitlement you do not want can be sold — the rights entitlements are traded on the stock exchange, separately from the equity share itself, during the issue period. Trading in the entitlement stops before the issue period ends, so that whoever bought it still has time to apply for the shares.
A worked example
Rahul holds 600 shares of a listed company. The share trades at Rs 250 cum-rights. The company announces a 1:3 rights issue at Rs 160 a share.
His entitlement: 600 ÷ 3 = 200 rights shares, costing 200 × Rs 160 = Rs 32,000.
If he subscribes in full:
| Shares | Cost (Rs) | |
|---|---|---|
| Existing holding | 600 | 1,50,000 (at Rs 250) |
| Rights taken up | 200 | 32,000 |
| After the issue | 800 | 1,82,000 |
The theoretical price once the share goes ex-rights is 1,82,000 ÷ 800 = Rs 227.50. His 800 shares are worth Rs 1,82,000 — exactly what he put in. No gain, no loss, and no dilution. The "discount" of Rs 90 to the market price was never free money.
If he does nothing: he still holds 600 shares, now worth 600 × Rs 227.50 = Rs 1,36,500, against Rs 1,50,000 before. He is Rs 13,500 poorer and owns a smaller fraction of the company. This is the single most valuable thing a foundation-level investor can learn: a rights issue you ignore costs you money.
If he renounces: the entitlement is worth roughly Rs 227.50 − Rs 160 = Rs 67.50 per rights share. Selling 200 entitlements on the exchange fetches about 200 × Rs 67.50 = Rs 13,500 — precisely the loss above. Renouncing leaves him whole in rupees, though with a reduced proportionate stake.
Why NISM asks about it
Chapter 3, section 3.14 (Rights Issue of Shares), which sits inside the four-way classification of issues in section 3.4. The chapter states the dilution rationale, the Companies Act obligation to offer to existing shareholders first, the 7-to-30-day window, ASBA-only payment, demat credit of entitlements, and renunciation with exchange trading of the entitlement. Expect a direct question on why a rights issue exists (answer: to prevent dilution of existing holdings), an entitlement-calculation question from a ratio, a question on the permitted open period, and a question on what "renouncing the rights" means.
Common exam traps
- A rights issue is not a bonus issue. Rights shares are paid for at a set price; bonus shares are allotted without any consideration. The workbook lists them together in one clause, which is exactly why candidates merge them.
- The ratio is rights shares to shares held, not to shares after the issue. "1:3" means one new share for every three held — 200 on a holding of 600, not 150.
- The rights price being below market is not a profit. The share re-prices downward to the theoretical ex-rights level. Ignoring the issue converts that re-pricing into a real loss.
- 7 days minimum and 30 days maximum, not 3 and 15, and not the 10-day-ish windows candidates half-remember from other issue types.
- Rights entitlements trade separately from the share, and trading ceases before the issue closes. Buy an entitlement on the last day of REs trading and you must still apply for the shares.
- Payment is ASBA-only here as well. Rights issues are not an exception.
Where this is taught
- Series IX · Chapter 4: Issue Management – Important Termsintroduced here
- Series VII · Chapter 1: Introduction to Securities Marketintroduced here
- Series XII · Chapter 3: Primary Marketsintroduced here
- Series II-A · Chapter 2: Characteristic of Equity Sharesintroduced here
- Series X-B · Chapter 13: Tax provisions for Special Casesintroduced here
- Series II-B · Chapter 2: Characteristic of Equitiesintroduced here
Related terms
- ASBAThe mandatory payment mechanism for public and rights issues, in which your bank blocks the application money in your own account and debits it only if you actually get an allotment.
- Preferential allotmentA private placement of shares made by a listed company.
- Primary marketThe market where an issuer sells securities to investors for the first time and receives the money itself — the "new issue market", as against the secondary market where investors trade among themselves.
- Fresh issueAn IPO structure in which the company issues new shares, so issued share capital rises and the money goes to the company.
- Renouncing the rightsDeclining a rights offer and selling the entitlement to someone else.
- Preferential issueAn issue of specified securities by a listed issuer to a select person or group on a private placement basis — excluding public, rights, bonus and ESOP issues, QIPs, sweat equity and overseas depository receipts.
- Corporate actionAn event initiated by a company that changes the securities it has issued — dividend, buyback, bonus, split, consolidation, rights issue or merger — and which the registrar has to execute investor by investor.