Rights Issue Explained: Entitlement Ratio, Renunciation and Whether You Should Subscribe

A rights offering offers new shares to existing holders at a set price and ratio. You can subscribe, renounce your entitlement or let it lapse. TERP shows the likely price after the issue.

A rights issue lands in your inbox as a notice with a ratio, a price and a deadline, and many shareholders are unsure what to do with it. The offer is valuable, but only if you understand what you are being asked to decide.

This guide explains how a rights offering works, how to read the entitlement ratio, your three choices, the theoretical ex-rights price, and a short checklist for deciding whether to subscribe.

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What Is a Rights Issue?

A rights offering is a way for a company to raise money by offering new shares to existing shareholders first. The shares are offered in proportion to your current holding, so you get the first right to buy before the company approaches outside investors.

Companies use a rights offering to repay debt, fund expansion or strengthen their balance sheet. The issue price is usually below the market price to encourage subscription.

Some offers are partly paid, which means you pay only part of the price now and the balance in later calls.

How the Entitlement Ratio Works

The ratio tells you how many new shares you may buy for each share you hold on the record date. A ratio of 1 for 4 means you can buy one new share for every four shares you hold. If you hold 100 shares, you are entitled to 25 new shares at the issue price.

The rights entitlement, often called an RE, is credited to your demat account under a separate code and can be traded on the exchange during a limited window.

Your Three Choices: Subscribe, Renounce or Let It Lapse

Choice	What you do	What happens
Subscribe	Apply and pay for the new shares before the deadline	You keep your stake and receive new shares
Renounce	Sell your rights entitlement on the exchange	You receive money for the rights, and your stake is diluted
Let it lapse	Do nothing	The entitlement expires with no value, and your stake is diluted

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You can apply through your broker or through the ASBA facility in your bank, which blocks the money until the shares are allotted. Renouncing is useful when you do not want to put in more money but still want to capture the value of the discount.

Theoretical Ex-Rights Price: A Quick Example

The theoretical ex-rights price, or TERP, estimates where the share should trade after the issue. Suppose a share trades at Rs 100 and the company offers 1 new share for every 4 held at Rs 80. The TERP is the weighted average: four shares at Rs 100 plus one share at Rs 80, divided by five, which equals Rs 96.

The market price on the ex-date may differ, but TERP gives you a fair benchmark. A larger discount lowers the TERP and increases the value of the right.

Should You Subscribe to a Rights Issue?

• Check why the company is raising money. Funding growth is a better reason than repaying losses.
• Compare the issue price with the current market price and with TERP.
• Look at the balance sheet, debt level and recent results, as for any other investment.
• Consider whether you would buy more shares at this price even without the discount.
• Note the deadlines for the record date, the trading window and the last date for application.

Rights are used by companies of all sizes, including large names tracked by the Nifty 50. The key point is that a discount does not make a weak business a good one.

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Conclusion

A rights offering gives existing shareholders first claim on new shares at a set price. You can subscribe, renounce or let it lapse, and the last choice usually costs you value through dilution.

Work out the TERP, review the reason for the capital raising and act before the deadline, so the decision is yours and not the calendar’s.

Frequently Asked Questions

What is a rights issue in simple words?

Ans. A rights offering is an offer by a listed company to its existing shareholders to buy new shares in a fixed ratio at a fixed price, normally at a discount. It lets the company raise money without approaching new investors first.

What does a rights entitlement ratio of 1 for 4 mean?

Ans. It means you can buy one new share for every four shares you hold on the record date. If you hold 100 shares, you can apply for 25 new shares at the issue price, provided you do so before the deadline.

What does it mean to renounce a rights offering?

Ans. To renounce is to sell your rights entitlement to another investor on the exchange instead of subscribing. You receive money for the right, but you do not get the new shares, so your percentage ownership falls.

What happens if I ignore a rights offering?

Ans. The entitlement lapses after the last date and you receive nothing for it. Your percentage stake falls because new shares are issued to others, and you lose the value of the discount you could have captured.

Is a rights offering good or bad for a share price?

Ans. It can be either. The price usually adjusts to the theoretical ex-rights price, because more shares are in issue. A good use of the money can lift future value, while a weak reason for raising funds can hurt sentiment.

How do I apply for a rights offering?

Ans. You apply through your broker or through the ASBA facility of your bank by the last date, using the rights entitlement credited to your demat account. The money is blocked until the shares are allotted, and any unused amount is released.

What is TERP?

Ans. TERP is the theoretical ex-rights price, the weighted average of the old market price and the rights offering price, adjusted for the ratio. It estimates where the share should trade after the issue and helps you judge the value of the offer.