How a rights issue works: ratio, record date and renunciation

The ratio and the discounted price

A rights issue is defined by its ratio and its price. The ratio tells you how many new shares you may buy for the shares you already hold, for example 1 new share for every 5 held, written as 1:5. The price is the rights price, set by the company below the prevailing market price to make the offer attractive and to compensate you for the dilution the new shares cause. If you hold 500 shares in a 1:5 rights issue, you are entitled to apply for 100 new shares at the rights price.

The discount is not free money, because issuing new shares spreads the company's value over a larger share count, which is why the market price adjusts downward when the stock goes ex-rights. The rights price simply sets the terms on which you, as an existing owner, get first claim on the new shares before anyone else. Whether to subscribe depends on why the company is raising money: a rights issue to fund growth is read very differently from one to repair a stressed balance sheet.

The record date and going ex-rights

A record date is fixed for the rights issue, and it decides who is eligible. Whoever appears as a shareholder on the record date receives the rights entitlement. To be eligible you must hold the shares such that your name is on the register by the record date, which, under the current settlement cycle, means buying before the stock goes ex-rights. After the record date the stock trades ex-rights, meaning a fresh buyer no longer receives the entitlement for that issue.

Once the issue opens, eligible shareholders see a rights entitlement credited to their demat account. This entitlement is the formal right to apply for the new shares at the rights price within the offer period. If you do nothing, the entitlement lapses at the end of the period and you lose both the right and the value attached to it, while your existing holding gets diluted by the new shares others subscribe to. That lapse is the most common way investors lose value in a rights issue, simply by ignoring it.

Renunciation: the right you can sell

The feature that surprises many retail investors is that the rights entitlement is itself tradeable. If you do not want to subscribe, you can renounce your entitlement, which means selling the right to apply to someone else. During the rights-issue period the entitlements trade on the exchange as a separate, temporary line, so a buyer who wants to subscribe can purchase your entitlement and then apply for the shares at the rights price. This lets you capture some value from the right rather than letting it lapse for nothing.

So a shareholder in a rights issue has three clear choices. Subscribe, by paying the rights price and taking the new shares. Renounce, by selling the entitlement on the exchange to recover its value. Or do nothing and let it lapse, which is almost always the worst outcome because you forfeit value and still suffer dilution. Knowing that the entitlement can be sold turns a rights issue from a yes-or-no decision into a three-way choice, and it is the single most useful thing to understand when one of your holdings announces a rights issue on the events desk.

Why companies raise money this way

A rights issue is one of several ways a company can raise fresh equity, and understanding why a board chooses it sharpens how you read the announcement. A rights issue offers the new shares to existing owners first, in proportion to what they already hold, which means a shareholder who subscribes fully does not get diluted relative to others. This is fairer to existing holders than a preferential issue to a select few or a qualified institutional placement that brings in outside investors, so a rights issue signals that the company wants to keep its current shareholders whole while raising capital.

The purpose of the raise is the real signal. A rights issue to fund a clear growth plan, a capacity expansion, or an acquisition is a constructive use of capital that existing owners may want to back. A rights issue whose stated purpose is to repay debt or shore up a stretched balance sheet is a warning that the business needed cash, and subscribing throws more money into a situation that may still be deteriorating. The discount on the rights price can tempt investors into subscribing without asking why the money is being raised, which is exactly the wrong order. Read the object of the issue first, judge whether you want to commit more capital to the company, and only then weigh the discount and decide whether to subscribe, renounce, or let it go.

FAQ4 reader questions · AEO-eligible

Common questions on rights issue mechanics.

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