A rights issue is when a company raises fresh money by offering new shares to its existing shareholders first, in proportion to what they already hold and usually at a discount to the market price. Unlike a bonus, these shares are not free. You choose whether to pay and subscribe.
Why would a company offer shares to existing holders?
When a company needs capital (to expand, repay debt, or fund a project) one fair way to raise it is to give current owners the first chance to put in more money, so their percentage ownership isn't diluted without their consent. The offer comes as a ratio and a price. For example, Bharat Paints Ltd might announce a 1:4 rights issue at ₹220, when the market price is ₹300: for every 4 shares you hold on the record date, you have the right to buy 1 new share at ₹220.
Divya holds 200 shares, so she can subscribe to 50 new shares for ₹11,000. If she subscribes fully, her stake in the company is undiluted. The usual date rules decide who gets this right. See what is the difference between record date and ex-date.
What is a rights entitlement (RE)?
Your right to subscribe arrives in your demat account as a separate, temporary instrument called a rights entitlement (RE). Think of it as a coupon: it represents the right, not the share itself. Holding the RE is what lets you apply during the issue window.
Because the right lets you buy at a discount, it has value of its own. REs are therefore tradable, for a limited period during the issue, they can be bought and sold on the exchange like a share. This is called renouncing your rights: a shareholder who doesn't want to invest more can sell the RE to someone who does, and recover some value instead of letting it expire.
That gives Divya three choices:
| Choice | What happens |
|---|---|
| Apply and pay | She gets the new shares after allotment |
| Renounce (sell the RE) | She pockets the RE's market price; the buyer can apply |
| Do nothing | The RE lapses worthless when the window closes |
The third outcome is the trap. An RE is not a share, if you neither apply nor sell before the deadline, it simply expires and its value is lost.
What happens to the share price?
On the ex-date, the market price typically adjusts slightly downward, because the company will soon have more shares outstanding, some issued below the market price. After allotment, the new shares are credited to applicants' demat accounts and trade like any others. As with every corporate action, the adjustment itself doesn't create or destroy your wealth, but unlike a bonus or split, your outcome here depends on the choice you make.
Application mechanics (payment methods, the exact trading window for REs, allotment timelines) are set out in each issue's offer letter and vary by issue, so always read the company's communication for the specific dates.
Things to keep in mind
- A rights issue is optional, but doing nothing is the one choice that guarantees losing the RE's value. Decide before the window closes.
- The discount alone doesn't make subscribing worthwhile; you are buying more of the same business, so judge the business first.
- If you don't subscribe (and don't sell the RE), your percentage stake in the company shrinks after the new shares are issued.
- Watch your demat account and the event tag in the app so the RE credit and its deadline don't slip past you.
Read next
What is a share buyback? — The reverse of an issue — the company buying its own shares back.