Rights Issue | Everything You Must Know in 2025

A rights issue of shares is among the most prevalent ways businesses opt to raise more capital from the market. Rather than directly approaching new investors, the company initially provides a chance to existing shareholders to purchase more shares. Such shares are generally made available at a price lower than the prevailing market price, hence making it appealing for the shareholders to join in.

A rights issue is simply an offer by the company to its existing shareholders, inviting them to subscribe for a new issue of shares in proportion to the number of shares they already hold. For instance, in a 1:5 right issue, an owner of five shares is offered the right to purchase one additional share at the determined issue price. Shareholders can exercise their rights, sell them on the market, or just allow them to expire.

The meaning of the rights issue is that it is a mechanism to improve the financial standing of a company without going for external borrowing. Companies can use a rights issue to finance new projects, repay debt, or improve liquidity. It is usually shareholder-friendly because it protects existing owners by issuing preferences before new owners.

In short, a rights issue of shares is a corporate move that weighs the interest of the company to raise capital against the interest of shareholders to preserve their proportional ownership.

What is Right Issue? 

A Rights Issue of shares allows the existing shareholders to buy additional shares at a price lower than the prevailing price, but it is an option for the shareholders, not a requirement. Such an offer typically comes in a ratio proportional to the number of shares they currently own.

The meaning of the rights issue lies in the term “right.” It provides existing shareholders with the first opportunity to retain or even expand their stake in the company before the shares are floated to outside investors. For instance, in a 2:10 rights issue, a shareholder who possesses 10 shares can purchase two extra shares at the company-determined issue price.

Features of Rights Issue

Here are some critical features for explaining the meaning of the right issue:

• Exclusive to Current Shareholders: A rights issue of shares is reserved for the company’s current shareholders, as they are accorded priority over new investors.

• Reduced Price: Another critical feature of the right issue is that the new shares tend to be priced at a rate lower than the market price, which is appealing to shareholders.

• Proportionate Allotment: In a rights issue, shares are sold in proportion to current ownership. Thus, For Example, if the ratio for the allotment of shares is 1:3, then it means the shareholders have a right to buy one share in exchange their four shares. 

• Right, Not Obligation: In the case of a right issue of shares, shareholders have the right to buy new shares but are not obligated to do so.

• Transferable Rights: In most cases, shareholders can renounce or sell their right to purchase new shares on the market. It provides benefits to the shareholders in monetary terms; if they do not prefer to invest, they can sell in the market. 
• Purpose of Capital Raising: A rights issue of shares primarily provides financial support for business growth, debt repayment, or enhances the company’s financial position.    
• Potential Dilution: The shares that fail to be exercised can be diluted as new shares for distribution to other people. 
• Shareholder-Friendly Practice: The rights issue protects the rights of existing shareholders from losing their ownership before taking the stakes from the external investors. 

Process for Rights Issue of Shares | Step-by-Step Guide

A rights issue of shares occurs when a company issues new shares to its existing shareholders before offering them to the general public. Following is the usual step-by-step process, with the rights issue meaning indicated as we proceed.

• Board decision & terms: The board sanctions a rights issue and determines fundamental terms, issue size, entitlement ratio (for example, 1:5), issue price, and reason for fundraising, the first formal act in deciding what is a rights issue for the company.
• Regulatory & stock exchange filings: The company shall file essential documents with the SEBI, and before initiating any offer, the company must obtain approval from the regulators.
• Determine entitlements & price: The proportion shall be calculated based on the rights issue ratio—for Example, the shareholder holding 50 shares can purchase 20 new shares.
• Record date/entitlement date: A record date is fixed to determine which shareholders will get the rights. The rights that are registered are received by those as of that date.
• Issue of offer document/rights notice: Shareholders have received the Letter of Offer, in which the details of the rights issue, subscription instructions, timing, and renunciation process have been written.
• Subscription period opens: The subscription period is opened for a specified duration. Shareholders can subscribe (exercise the rights), sell/renounce their rights, or allow them to lapse.
• Renunciation or trading of rights: Where allowed, rights are transferable, and non-investor shareholders can sell their rights in the market or waive them in favour of a third party.
• Collection of funds & allotment: The shares have been fully subscribed, application money received, and allotment has been done on a proportional basis. 
• Treatment of unsubscribed shares: The shares which are unsubscribed can be underwritten, and may be dealt according to the offer document.
• Listing & post-issue formalities: The shares which are allotted shall be listed, and the company updates the register of allotment and utilises the funds. That wraps up the rights issue, meaning in practice, and raising funds while offering existing owners a preference.

Reasons Why Companies Prefer the Right Issue of Shares. 

The main reasons for companies which prefer the rights issue of shares is for expansion, repayment of debts, or to make the strongest balance sheet. The most important feature of the right issue of shares is that it provides a right to existing shareholders to buy new shares at a low price. These are the primary reasons for firms using the technique of raising capital.

1. Quick Access to Capital: A rights issue of shares provides firms with access to capital in a faster way than a public offering, as the opportunity is provided to them for shares are offered directly to existing shareholders.
2. Lower Cost of Fundraising: Another key feature of a rights issue is that it carries less marketing and administrative costs than an FPO or IPO.
3. Shareholder Friendly Approach: The rights issue definition encompasses the protection of current shareholders by giving them preference and preventing immediate dilution of ownership.
4. Preserves Control: As shares are initially offered to existing shareholders, promoters can invest and retain their majority stake.
5. Use of Funds Flexibility: A share rights issue raises funds for various purposes, such as paying debts, funding expansion schemes, or enhancing liquidity.
6. Confidence Signal to Market: The rights issue indicates confidence in the management for the expansion of the company, providing a good indication to the shareholders. 

Types of Rights Issue

Learning about what a rights issue is helps to understand that firms may have the right to issue shares in various ways based on their requirements and the needs of their shareholders. The meaning of the rights issue varies with each of these forms, as discussed below:

1. Renounceable Rights Issue 

In this form, the rights issued to current shareholders are transferable.

• Shareholders who do not want to subscribe can sell or “renounce” their rights in the stock market to another investor.
• They ensure that they still receive value even if they don’t take part.
• Example: If you cannot invest any further, you can sell your rights entitlement to another buyer.

2. Non-Renounceable Rights Issue

In this case, the rights are non-transferable.

• Shareholders have the option of subscribing to the offer or allowing the rights to lapse; they can’t sell them in the market.
• This type of rights issue of shares is more stringent since shareholders have to choose between exercising the right or forgoing it.

3. Fully Paid Rights Issue 

Here, shareholders have to pay the total issue price at the point of subscription. The meaning of the rights issue in this case is straightforward: once you subscribe and pay up, new shares are automatically allotted to you.

4. Partly Paid Rights Issue

Rather than paying the whole amount in one go, shareholders have the option to pay in instalments.

• For instance, 40% can be paid upon subscription, and the rest in calls from time to time.
• This facilitates ease of participation for the shareholders without having to make the full cash outlay at once.

Factors Related to the Rights Issue

Before deciding to undertake a rights issue related to shares, firms must consider various factors that may influence the success of the offer and the level of shareholder participation. To understand what a rights issue is and how it operates, it is essential to examine the key factors that determine the process. 

• Purpose of Fundraising: First among the determinants of the right issue is the purpose of the company. It helps in raising funds, repayment of debt, and for the requirements of working capital.
• Issue Price: A rights issue of shares made available at a price less than the market price. The discount in the issue price provokes investors to participate in the issue. 
• Entitlement Ratio: The entitlement ratio determines the proportion of the newly issued shares allowed to investors in relation to their current holdings. 
• Type of Rights Issue: The rights may be renounceable or non-renounceable, may be wholly or partly paid, which impacts the shareholders’ decision. 
• Regulatory Approvals & Compliance: An essential consideration is compliance with SEBI or the relevant stock exchange rules prior to issuing the securities, to ensure transparency and protect investors.
• Shareholder Decision: The exercisable right is dependent on the decision of the shareholders so that they can waive/sell/allow their rights to lapse.
• Effect on Shareholding Pattern: If investors do not subscribe, the percentage of their holding may be weakened and allowing promoters to expand their issue or retain control.

Impact of Rights Issue on Shareholders

For analysing the meaning of the right issue, Investors also need to understand the impactful nature of the investors. The rights issue of shares has affected the value of shareholders, ownership, and future returns, which the issuance of rights shares can directly impact. 

Chancing to Purchase at a Lower Price

1. Retention of Ownership Percentage: Another key feature of a rights issue is that it provides shareholders with an opportunity to retain their proportion of ownership in the business without diluting their holding.
2. Risk of Dilution if Not Taken: If the shareholders do not exercise the option to subscribe, their proportion of ownership may decrease, as the new shares are allocated to them. 
3. Flexibility by way of Renunciation: There is an option of renunciation to the investors if they do not opt for the choice of subscription. The shares can be transferred to others and have the benefit of more capital.
4. Requirement of Additional Investment: Shareholders require additional funds for subscription, which has a significant impact and a substantial burden on others. Many calls shall be made in the situation of partly paid issues.   
5. Scope for Long-Term Returns: Shareholders can benefit from the company’s expansion, as the capital raised is utilised for expansion, debt repayment, or balance sheet strengthening. 
6. Market Reaction and Share Price Movement: The Stock price may be impacted by the declaration of rights, and may be offer at a discount can reduce the price of the market.

Difference between Rights Issue and Bonus Issue

Benefits of the Rights Issue

Speedy Fundraising: A rights issue of shares helps raise funds faster than a public issue, and they can be directly issued to existing shareholders.

Lower Expense: The main advantage of the rights issue is to incur fewer regulatory and advertisement costs, rather than those of IPOs or FPOs.

Shareholder Friendly: The meaning of a rights issue analysis is that shareholders have priority, so that the preservation can enhance their holdings.

Discounted Price: Rights issue is generally issued at a discount price to make a profit in the long term.  

Preserves Promoter Control: The promoters can also participate in the rights issue to enhance the control over the company.

Scope for Flexible Use of Funds: Money raised from a rights issue of shares can be utilised towards expansion, repayment of debt, working capital, or acquisitions.

Positive Market Signal: A rights issue often signals management’s confidence in the company’s prospects, which can build investor trust.

Limitations of the Rights Issue

• Dilution of Ownership: The primary disadvantage of a rights issue of shares is that shareholders can have their ownership proportionally diluted and allocated to other people.
• Further Financial Burden: For understanding the meaning of rights issue, shareholders shall pay an additional amount to exercise their rights.
• Negative Market Perception: The meaning of the issue may be interpreted negatively, which triggers financial pressure or a lack of funds.  
• Uncertainty over Use of Funds: In a case, if the company do not use adequate capital, and the rights issue is not processed, then it leads to lower confidence of the shareholders.
• Non-Transferable Limitation: During a non-renounceable rights issue, shareholders who prefer not to participate cannot dispose of their rights, resulting in potential value loss.

Let’s Wrap

Rights issue of shares is one of the most common practices used by companies to raise more capital while keeping the current shareholders at the heart of the exercise. For issuing the new shares at a discounted price and making proportionate distribution to the holdings of the existing shareholders, companies offer trustworthy insights for the right of subscription.

The rights issue contributes to balancing the interests of both companies and shareholders. The rights issue is considered the most economical and speedy way to raise funds for growing. 

Meanwhile, it provides flexibility with renounceable rights, whereby shareholders can dispose of their right in the market should they not want to join in.

Nonetheless, the definition of a rights issue is not without problems. Non-subscribing shareholders lose their ownership, and having to put up more money can be onerous. Further, markets occasionally react adversely to rights issues, perceiving them as an indicator of financial fragility, particularly when applied simply to absorb losses or service too much debt. These are limitations notwithstanding; rights issues are still one of the most feasible and equitable means of raising money.

FAQs

1. What is a Rights Issue?

A rights issue of shares is when a company issues new shares to its current shareholders at a lower price. A right issue is simply an offer by the company to its existing shareholders, inviting them to subscribe for a new issue of shares in terms of the number of shares they already possess.

3. Who can join a Rights Issue of Shares?

Only present shareholders on the company’s record date are allowed. The shareholders have a right to subscribe, transfer, or let the shares to lapse.

4. Why is a Rights Issue undertaken?

Companies enable rights issues of shares for mobilising new funds, for debt repayments, or to make improvements in the balance sheet. 

5.  What are the criteria for the renunciation of the rights issue?

No. Rights issues are either renounceable (transferable) or non-renounceable (non-transferable), as decided by the company.

6. What if I do not subscribe to a Rights Issue?

If a shareholder fails to exercise his right, his holding is diluted by the new issue being allocated to others. This is the part of the rights issue’s meaning.