An invitation to existing shareholders to purchase additional shares at a discount. Understand the complete rights issue process, benefits, and key considerations.
A rights issue is an offer by a company to its existing shareholders to buy additional shares at a discounted price, usually in proportion to their current holdings. It's a common method for companies to raise capital while giving shareholders the opportunity to maintain their ownership percentage.
This process is governed by securities regulations and must comply with stock exchange requirements. The offer is typically made through a letter of rights sent to eligible shareholders.
Companies opt for rights issues for various strategic and financial reasons that benefit both the business and its shareholders.
Primary reason is to raise equity capital for expansion, debt reduction, acquisitions, or working capital needs without taking on additional debt.
Gives existing shareholders first right to maintain their ownership percentage and benefit from discounted shares before new investors.
More cost-efficient than public offerings as it avoids underwriting fees and has lower marketing and regulatory costs.
Can be completed quicker than other fundraising methods since it targets existing shareholders who are already familiar with the company.
Shareholders can purchase additional shares at a price typically 15-25% below the current market price, offering immediate value.
Allows shareholders to maintain their proportional ownership by purchasing additional shares before they're offered to others.
Rights can be sold on the stock exchange if shareholders choose not to participate, providing flexibility and potential profit.
Funds raised typically strengthen the company's balance sheet and support growth initiatives that can enhance long-term value.
Shareholders are not obligated to participate - they can choose to exercise, sell, or let their rights lapse.
Ensures all existing shareholders are treated equally with the same opportunity to participate proportionally.
Company board approves the rights issue, including ratio, price, and purpose of funds raised.
Necessary documents filed with regulatory authorities and stock exchanges for approval.
Cut-off date to determine eligible shareholders who can participate in the rights issue.
Rights become tradable on the stock exchange for a specified period (usually 7-15 days).
Shareholders can exercise their rights by submitting application and payment (typically 15-30 days).
New shares allotted and credited to demat accounts, then listed on stock exchange for trading.
| Term | Description | Example |
|---|---|---|
| Issue Ratio | Number of new shares offered per existing shares held | 1:2 (1 new share for every 2 held) |
| Issue Price | Discounted price at which new shares are offered | ₹150 when market price is ₹200 |
| Record Date | Cut-off date to determine eligible shareholders | 15th June 2024 |
| Rights Trading | Period during which rights can be bought/sold | 20th-27th June 2024 |
| Subscription Period | Window to apply for new shares | 1st-15th July 2024 |
| Ex-Rights Date | First trading day when shares trade without rights | 18th June 2024 |
If you don't exercise your rights, your percentage ownership in the company will be diluted. The unsubscribed shares may be allocated to other shareholders who have applied for additional shares or to institutional investors through the underwriting agreement.
Yes, during the rights trading period, you can sell your rights entitlement on the stock exchange, just like regular shares. The rights will trade under a separate ISIN during this period. The value will depend on the difference between the rights price and market price.
The board determines the issue price considering factors like current market price, need for funds, and shareholder interests. Typically it's set at a 15-25% discount to the market price to make it attractive. For listed companies, SEBI guidelines require the price to be determined based on SEBI ICDR regulations.
There are no immediate tax consequences when you exercise rights. For capital gains calculation, the cost basis includes both the rights cost and subscription price. If you sell the rights, it's treated as capital gains. Tax treatment varies by jurisdiction - consult a tax advisor for specifics.
Yes, you can apply for additional shares beyond your entitlement. These are called "oversubscription" shares. The company will allocate any unsubscribed shares proportionally among those who applied for extra shares, after fulfilling all basic entitlements.
Contact our experts for guidance on rights issue process, subscription, and understanding your options as a shareholder.