Rights Issue
A rights issue is a corporate action where a company offers existing shareholders the right to purchase additional shares at a discounted price, in proportion to their current holding, to raise fresh capital from existing investors.
Understanding Rights Issue
Rights issues raise capital while preserving existing shareholders' percentage ownership. If you hold 1% of the company before, and you fully subscribe to your rights, you'll hold 1% after. Not subscribing dilutes your stake but lets you sell the right itself for cash.
SEBI mandates fairness norms: the rights ratio (e.g., 1:5 — one new share per five held) and discount must be disclosed in advance. Subscription windows are typically 15-30 days. The company files a Letter of Offer with SEBI before opening the rights issue.
Why it matters
Rights issues offer existing shareholders a way to buy more of a company at a discount. If you have conviction in the company, subscribing is usually accretive. If you don't have spare capital or conviction, selling the rights for cash is the next-best option. Letting them lapse is rarely the right choice — you forfeit value with no benefit.
Example
You hold 500 shares of a company at ₹400 market price. The company announces a 1:5 rights issue at ₹250 per share. You're entitled to 100 new shares at ₹250 each (total ₹25,000). Three options: (1) subscribe — get 100 shares at ₹250 vs ₹400 market = instant gain; (2) sell the right itself on the exchange (the right has a value, typically ~₹130–150 per right unit); (3) let it lapse (worst option — value is lost).
You hold 500 shares of a company at ₹400 market price. The company announces a 1:5 rights issue at ₹250 per share. You're entitled to 100 new shares at ₹250 each (total ₹25,000). Three options: (1) subscribe — get 100 shares at ₹250 vs ₹400 market = instant gain; (2) sell the right itself on the exchange (the right has a value, typically ~₹130–150 per right unit); (3) let it lapse (worst option — value is lost).