Rights issue of shares
New shares offered to existing shareholders at a price: take them, renounce them or let them lapse.
A rights issue is an offer of new shares to a company's existing shareholders, in proportion to what they already hold, usually at a price below the market price. It lets a listed company raise money from the people who already own it, without first offering the shares to outsiders.
The shareholder has a real choice: pay and take the shares, sell the right to someone else, or let it lapse. That is what separates it from a bonus issue, where extra shares arrive free and no money is raised.
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Terms you will meet in a letter of offer
- Rights ratio
- New shares offered per shares held. A 1:4 rights issue offers 1 new share for every 4 held.
- Record date
- The date that fixes who is eligible. Under Regulation 68 of the SEBI ICDR Regulations, a company cannot withdraw the issue after announcing the record date; if it does, it cannot apply to list any securities for 12 months from that record date.
- Rights entitlement (RE)
- The right to apply, credited to the shareholder's demat account before the issue opens (Regulation 77A). The letter of offer must explain how REs are credited and how they can be renounced.
- Renunciation
- Giving up your entitlement in favour of another person, the renouncee, who can then apply for those shares.
- Letter of offer
- The offer document for a rights issue, in place of a prospectus. It carries the issue price, ratio, objects of the issue and risk factors.
- ASBA
- Application Supported by Blocked Amount. Regulation 76 requires every rights application to use it: the money is blocked in the applicant's bank account and debited only on allotment.
A 1:4 rights issue in rupees
Illustrative numbers. Arjun holds 400 shares trading at ₹500. The company offers 1 new share for every 4 held at ₹400.
Shares Arjun can apply for
Working
400 ÷ 4
Result
100 shares
Money needed to take them up
Working
100 × ₹400
Result
₹40,000
Theoretical ex-rights price (TERP)
Working
(4 × ₹500 + 1 × ₹400) ÷ 5
Result
₹480
Theoretical value of one entitlement
Working
₹480 minus ₹400
Result
₹80
If he lets it lapse
Working
400 shares now worth about ₹480 each
Result
His stake is diluted and he loses about ₹8,000 of value (400 × ₹20)
| Item | Working | Result |
|---|---|---|
| Shares Arjun can apply for | 400 ÷ 4 | 100 shares |
| Money needed to take them up | 100 × ₹400 | ₹40,000 |
| Theoretical ex-rights price (TERP) | (4 × ₹500 + 1 × ₹400) ÷ 5 | ₹480 |
| Theoretical value of one entitlement | ₹480 minus ₹400 | ₹80 |
| If he lets it lapse | 400 shares now worth about ₹480 each | His stake is diluted and he loses about ₹8,000 of value (400 × ₹20) |
Arjun's four choices
- 1
1. Subscribe in full
Apply for all 100 shares through ASBA. His percentage stake stays the same.
- 2
2. Apply for additional shares
Apply for his 100 plus extra. Extra shares are allotted only from the under-subscribed portion, on an equitable basis (Regulation 90).
- 3
3. Renounce the entitlement
Pass his REs to someone else, usually for a price, in the manner the letter of offer sets out. The renouncee, not Arjun, then applies.
- 4
4. Do nothing
The entitlement lapses after the issue closes. He keeps his 400 shares, but they now form a smaller percentage of a larger share capital.
Free account, this exam preselected.
Rules the merchant banker applies
- check_circleThe issuer must meet the Chapter III conditions on the reference date: when it files the draft letter of offer with the stock exchanges and when it files the letter of offer. Since April 2025, the draft goes to the stock exchanges rather than to SEBI.
- check_circleAn issuer cannot make a rights issue if it, its promoters, promoter group or directors are debarred by SEBI, if a promoter or director is a fugitive economic offender, or if its shares are suspended from trading as a disciplinary measure.
- check_circleThe price is fixed before the record date and cannot be below face value.
- check_circleMinimum subscription is 90% of the issue, subject to the exceptions in Regulation 86; otherwise the money is refunded.
- check_circleThe issue stays open for the period SEBI specifies. The old fixed window of 7 to 30 days was removed from the regulation in April 2025. Applications cannot be withdrawn after the issue closes.
- check_circleAllotment is in demat form only.
How Series IX tests this
The most common question is arithmetic: shares receivable under a ratio, money needed, or the ex-rights price. Practise the TERP formula until it is automatic: (old shares × market price + new shares × issue price) ÷ total shares.
The trap is treating a rights issue like a bonus issue. A question that says 'the shareholder receives shares free' or 'the issue does not raise funds' describes a bonus. A rights issue always has a price and always raises money if subscribed. A second trap is the withdrawal rule: withdrawal after the record date triggers the 12-month listing bar.
FAQs
What is a rights issue of shares?expand_more
An offer by a company to its existing shareholders to buy new shares in proportion to their holding, usually at a discount to the market price, to raise fresh capital.
What happens if I do not apply in a rights issue?expand_more
Your entitlement lapses after the issue closes. You keep your shares, but your percentage stake falls and the share price usually adjusts towards the ex-rights price. Renouncing the entitlement before it lapses is the alternative.
Can I sell my rights entitlement?expand_more
Yes. Rights entitlements are credited to your demat account before the issue opens, and you can renounce them in favour of another person, usually for a price. The letter of offer explains how renunciation works for that issue.
What is the difference between a rights issue and a bonus issue?expand_more
A rights issue asks shareholders to pay for new shares and raises money for the company. A bonus issue gives free shares out of reserves and raises nothing.
Can a company cancel a rights issue?expand_more
Not after announcing the record date without a penalty. Under Regulation 68 of the SEBI ICDR Regulations, a company that withdraws after the record date cannot apply to list any of its securities for 12 months.
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