What is a rights issue?

A rights issue is a way to raise money from people who already own the company, rather than from the public at large. Companies use it to fund growth, reduce debt, or strengthen their balance sheet. Because the shares are offered to existing holders first, it respects their claim on the business.

The offer is described as a ratio, for example 1:5, meaning one new share for every five you already hold. The new shares are typically priced at a discount to the current market price to encourage participation, but that discount is not free money — it reflects the fact that more shares will now exist.

The company announces a record date. If you hold the shares in your demat account on that date, you are eligible and the rights entitlement is credited to your account. SEBI rules govern the disclosures and timeline so shareholders can make an informed choice.

During the offer window you can subscribe by paying for the new shares, renounce by selling your rights entitlement to someone else through the exchange, or do nothing and let the entitlement lapse. Letting it lapse usually means you forgo any value in the rights, which is why ignoring a rights issue is itself a decision.

Take up the rights — you pay the offer price and increase your holding, keeping your proportionate ownership intact. Sell the rights — rights entitlements trade on the exchange for a short window, so you can sell them to another investor and capture some value without putting in more money. Let them lapse — you do nothing, your ownership percentage falls, and you typically receive nothing for the unused rights.

The right choice depends on whether you want to invest more in the company and on the price of the rights entitlement in the market relative to the discount on offer.

Because new shares are created, each existing share represents a slightly smaller slice of the company afterwards — this is dilution. If you take up your full entitlement, your proportionate stake is preserved; if you do not, your stake shrinks.

After the record date the share often trades at a lower ex-rights price, because the value of the discounted new shares is spread across a larger share count. This adjustment is mechanical and is not the same as the company losing value, so a lower screen price after a rights issue can be misleading if read in isolation.

Read why the company is raising money. Funding profitable expansion is very different from repeatedly raising cash to cover losses or service debt. The prospectus and the stated use of proceeds tell you which situation you are in.

Weigh the discount against the dilution, and consider whether you genuinely want to commit more capital to this business. A rights issue is an opportunity, not an obligation — and like all equity, the shares carry the full risk of the market, including possible loss of capital.