A rights issue is when a company offers its existing shareholders the right to buy new shares, in proportion to what they already own, usually at a price below the current market price. It is a way for a company to raise money while giving current owners the first chance to invest.
What a rights issue is
When a company needs fresh capital, for expansion, to repay debt or to strengthen its balance sheet, it can issue new shares. In a rights issue, these shares are offered first to existing shareholders, so they can keep their percentage ownership if they choose. A ratio sets the entitlement: a "1:5 rights issue" lets you buy one new share for every five you hold.
How it works in India
The company announces the ratio, issue price and a record date. Eligible shareholders receive rights entitlements (REs) in their demat accounts. You can then: apply and pay for the new shares, sell (renounce) your entitlements on the stock exchange during the trading period for REs, or let them lapse. Applications are made through your bank or broker, typically using ASBA, similar to IPOs. The issue price is usually at a discount to the market price to encourage participation.
A simple example
You own 500 shares trading at ₹150. The company announces a 1:5 rights issue at ₹110. You are entitled to 100 new shares. If you apply, you pay ₹11,000 and end up with 600 shares. If you do not want to invest, you can sell your 100 rights entitlements on the exchange during the RE trading window and receive their market value. If you do nothing, the entitlements lapse and your ownership percentage falls.
What happens to the share price
Because new shares are issued below market price, the share price usually adjusts on the ex-rights date. The theoretical ex-rights price combines the old shares at the market price and the new shares at the issue price. In the example, five shares at ₹150 plus one at ₹110 gives a value of ₹860 for six shares, about ₹143 per share.
Why it matters for investors
A rights issue requires a decision: invest more, sell your entitlements, or accept dilution. Also look at why the company needs money. Raising capital for a clear growth plan is very different from raising it to cover losses or pay overdue debt.
How to decide
Read the company's letter of offer to understand how the money will be used. Check its debt, recent results and whether promoters are subscribing to their share, which can signal confidence. Consider whether you are comfortable increasing your investment in the company. If not, selling your entitlements is usually better than letting them lapse, because lapsed rights simply disappear.
Common misconceptions
"The discount is free profit." The share price adjusts, so the discount is largely offset.
"Ignoring a rights issue costs nothing." Lapsed entitlements mean dilution and lost value; selling REs can capture some of it.
"A rights issue is always good news." It depends on why the money is needed.
Frequently asked questions
What are rights entitlements?
The electronic rights credited to your demat account, which you can use or sell.
Can I buy more than my entitlement?
Many issues allow applying for additional shares, subject to availability.
What is renunciation?
Selling or transferring your rights to someone else.
Is the issue price always discounted?
Usually, but not always.
How to use this on PositoAI
Track rights issues and other corporate actions on the Actions page, and check the company's page for its debt and any red flags to understand why it may be raising money.
Summary
A rights issue offers existing shareholders new shares in proportion to their holding, usually at a discount. In India, rights entitlements are credited to demat accounts and can be used, sold on the exchange or left to lapse. The share price adjusts on the ex-rights date, so the discount is not free profit, and the reason for raising money matters most.