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What is a rights issue of shares
A rights issue is a corporate action where a company raises fresh capital by offering new shares to existing shareholders at a price below the current market price, in proportion to their existing holding. Shareholders can subscribe, sell their rights entitlement, or let it lapse.
In one line
In a rights issue, a company offers new shares to existing shareholders in a fixed ratio (such as 1 share for every 5 held) at a price set below the current market price, giving them the right to maintain their ownership percentage by subscribing, and the rights entitlement itself is tradeable on the exchange for a limited period before the issue closes.
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Why companies raise capital via rights issues
A rights issue is a primary market transaction where the company creates new shares and sells them to raise capital. The appeal for the company is that it reaches existing shareholders who already have a stake in the business, avoids the marketing cost of an IPO, and can close the fundraise faster. For shareholders, the offer at a discount to market price is the incentive to participate.
Common reasons companies run rights issues include funding expansion, reducing debt, or bolstering the balance sheet during a stress period. Unlike a preferential allotment (which goes to select investors) or a QIP (which goes to institutional buyers), a rights issue is democratised: every existing shareholder gets a proportional entitlement based on their holding on the record date.
The entitlement ratio and the record date
The ratio specifies how many new shares you can buy for every existing share you hold. A 1:5 rights issue means you can subscribe to 1 new share for every 5 shares you currently hold. The record date is the cut-off: shareholders who hold shares on that date receive the rights entitlement. If you buy shares after the record date, you do not receive the entitlement for that transaction.
The issue price is set at a discount to the current market price to make subscribing attractive. The theoretical price after the rights issue settles (the theoretical ex-rights price, or TERP) is a weighted average of the existing shares and the new shares issued at the lower price. So the market price of the stock typically adjusts downward after the issue, reflecting the dilution from new shares being added at a below-market price.
Your three choices: subscribe, sell, or lapse
Once you receive a rights entitlement, you have 3 options. First, subscribe fully or partially by paying the issue price for the shares you want. Second, sell your rights entitlement on the exchange for the limited window the exchange provides, capturing the value of the discount without deploying fresh capital. Third, let the entitlement lapse by doing nothing, in which case the value embedded in the discount is forfeited.
If you do not subscribe and do not sell your rights, your stake in the company is diluted: you own the same number of shares as before, but the total shares outstanding increases, so your percentage ownership shrinks. In an actively traded rights issue, the entitlement typically trades on the exchange, making the sell option practically viable. In a smaller or thinly traded company, the rights market may be illiquid, making subscription or lapsing the practical choice.
FAQ4 reader questions · AEO-eligible
Common questions on what is a rights issue.
What happens if I do not subscribe to a rights issue?
Your ownership percentage in the company is diluted. The new shares go to subscribers and the total share count rises, reducing your proportionate stake. If the rights entitlement was tradeable, you also forgo any value you could have realised by selling it.
Is a rights issue good or bad for shareholders?
It depends on the purpose. A rights issue to fund profitable expansion at a good return can benefit shareholders over time. A rights issue to repair a stressed balance sheet means you are being asked to put in more capital to fix existing problems. The quality of the capital deployment matters more than the act of the rights issue itself.
Can I sell my rights entitlement?
Yes. SEBI allows rights entitlements to be traded on the exchange for a specified window during the rights issue period. You can sell your entitlement and capture its market value without subscribing.
Is a rights issue the same as an FPO?
No. A rights issue is exclusively offered to existing shareholders in proportion to their holding. An FPO (Follow-on Public Offer) is open to the general public, including new investors, through a fresh public offering process.
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