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What Is a Rights Issue and How Does It Work?

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by

MyFinanceBandhu Desk
in

A rights issue is an offer of new shares by a listed company to its existing shareholders, in a fixed ratio to what they hold on a date the company chooses. The shares are usually priced at a discount to the market price. SEBI’s ICDR Regulations define it as an offer of specified securities by a listed issuer to its shareholders as on a record date fixed for that purpose.

Because it goes to every existing shareholder, a rights issue differs from a preferential issue, which goes only to selected persons.

Who gets to take part, and how is that decided?

The record date, the cut-off date the company fixes, decides which shareholders are eligible. If you hold shares on that date, you are offered new shares in the stated ratio. A ratio of 1:5 means one new share for every five held.

The issue price must be fixed before the record date is set. Once the record date is announced, the company cannot withdraw the issue. If it does, it cannot apply to list any securities for 12 months from that record date.

What is a Rights Entitlement?

A Rights Entitlement (RE) is the number of new shares you are allowed to apply for. It is worked out by applying the ratio to your holding on the record date. REs are credited to your demat account under a separate ISIN, a unique code that identifies a security, before the issue opens.

  • You have four choices with your REs:
  • Apply for all of them.
  • Apply for part of them.
  • Renounce or sell all or part of them.
  • Let them lapse.

REs that are neither subscribed nor renounced by the issue closing date lapse and are extinguished. If you paid a premium to buy those REs, that money is lost.

What does a rights issue look like in numbers?

This is a hypothetical example with invented figures. Say you hold 500 shares, the market price is ₹100, and the company offers 1:5 at ₹80.

  • Your REs: 500 ÷ 5 = 100 new shares.
  • Cost to take them all up: 100 × ₹80 = ₹8,000.
  • Rough intrinsic value of each RE, meaning market price minus rights issue price: ₹100 − ₹80 = ₹20.

If you let the REs lapse, you still hold 500 shares, but the company now has more shares in total if others subscribe. Your percentage ownership therefore falls.

What is the theoretical ex-rights price?

The theoretical ex-rights price (TERP) is the combined value of the existing shares and the money paid for the new shares, divided by the total number of shares after the issue. It is a calculation, not a forecast of where the stock will trade.

Using the hypothetical numbers above, assume the company’s whole share base is just your 500 shares:

(500 × ₹100 + 100 × ₹80) ÷ 600 = ₹58,000 ÷ 600, which is about ₹96.67.

Another example: 300 shares at ₹10 with a 1:5 rights issue at ₹8 give (3,000 + 480) ÷ 360, which is about ₹9.67.

Can someone who was not a shareholder join in?

Yes. You can buy REs on the exchange or off-market and then apply before the issue closes. Buying REs without applying gives you no shares, and the REs lapse at closing.

Trading in REs on the exchange starts when the issue opens and must close at least four days before the issue closes. Off-market transfers must credit the buyer’s demat account on or before the issue closing date.

How are REs priced on the exchange?

On the first day of RE trading, the exchanges set the base price as the stock’s closing price minus the RE price. On each later day, the previous day’s closing price of the RE is the base price.

The intrinsic value, market price minus issue price, is only a rough guide. In the hypothetical example it is ₹20 per RE. A RE can trade at a different figure, and if you buy one at a premium and it lapses, the premium is gone.

How do you pay, and what is the catch?

Applications can be made only through ASBA (Application Supported by Blocked Amount). Your money stays in your bank account but is blocked until allotment. The SEBI FAQ confirms ASBA is the only payment mode for rights issues.

You can submit only one application form for the REs in a given demat account. In the hypothetical example, ₹8,000 would be blocked for the full 100 REs. That money cannot be used elsewhere while it is blocked.

How long does a rights issue take now?

Under the SEBI framework effective 7 April 2025, a rights issue must be completed within 23 working days of the company’s board approving it. This replaced an average of about 317 days for non-fast-track issues and 126 days for fast-track issues.

A shorter timeline means the dates for the record date, the RE credit, the trading window and the closing date come close together. Missing the closing date means the REs lapse.

What are the main risks to understand?

– Lapse: Unused REs are extinguished at closing. Any premium paid for them is lost. – Ownership falls: Not subscribing while others do reduces your percentage stake, as in the 500-share example. – Blocked money: ASBA holds the full application amount until allotment. – Discount is not a guarantee: The issue price is usually below the market price. The TERP shows that the discount is built into the post-issue average, so it does not by itself create value.

Sources and last check

Facts in this article were checked against the sources below on 1 November 2026. Rules and figures can change; check the primary source before acting.

This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.

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