What a rights issue is

A company that needs money can sell new shares to anyone (a fresh issue or placement), or it can offer them first to the people who already own it. A rights issue does the second: every existing shareholder gets the right to buy new shares in proportion to what they hold, usually at a price below the market.

Three terms do most of the work:

  • Ratio — “1 for 5” means one new share for every five you hold on the record date.
  • Issue price — what you pay per new share, usually at a discount.
  • Rights entitlement (RE) — the right itself. Since 2020 REs are credited to your demat account as a separate security, and you can renounce them: sell them on the exchange, or transfer them off-market, to someone who will subscribe instead (SEBI circular SEBI/HO/CFD/DIL2/CIR/P/2020/13, 22 January 2020). REs that are neither used nor renounced lapse when the issue closes.

SEBI (the Securities and Exchange Board of India) sped the process up in 2025. For issues approved by a company’s board on or after 7 April 2025, a rights issue must be completed within 23 working days of that approval; the draft letter of offer goes to the stock exchanges rather than to SEBI for observations; the issue stays open for 7 to 30 days; and on-exchange RE trading closes three working days before the issue does (SEBI/HO/CFD/CFD-PoD-1/P/CIR/2025/31, 11 March 2025, under the ICDR (Amendment) Regulations, 2025).

The formula

Because the new shares come in below market, the share price adjusts when it goes ex-rights. The standard estimate is the theoretical ex-rights price (TERP) — the same calculation Ind AS 33 uses to adjust EPS for the “bonus element” in a rights issue:

TERP = (Old shares × Price before ex-rights  +  New shares × Issue price)
       ÷ (Old shares + New shares)

Theoretical value of one RE = TERP − Issue price

Worked example: a fictional Desi Bites rights issue

Every term here is invented for teaching. Desi Bites has announced no rights issue — and with the cash it holds after its IPO it wouldn’t need one. We borrow only its share count.

Term  
Ratio 1 for 5
Shares before (lakh) 12.5
New shares (lakh) 2.5
Issue price ₹480
Market price just before ex-rights ₹600
Discount to market 20%
Money raised ₹1,200 lakh
  1. TERP = (5 × 600 + 1 × 480) ÷ 6 = ₹580.
  2. Each RE is worth about ₹580 − ₹480 = ₹100: the discount you’d capture by subscribing.
  3. You hold 100 shares worth ₹60,000 and get 20 REs. Your three choices, valued at the TERP:
Choice You pay You receive Shares after Value of shares Change in your wealth
Subscribe (pay for the rights shares) 9,600 0 120 69,600 0
Renounce (sell the REs at their theoretical value) 0 2,000 100 58,000 0
Do nothing (let the REs lapse) 0 0 100 58,000 −2,000

Subscribing and selling the REs both leave you where you started — one puts ₹9,600 more into the company, the other takes ₹2,000 out in cash. Doing nothing is the only choice that costs money: ₹2,000, the value of REs you let lapse.

And the dilution. The share count rises from 12.5 lakh to 15 lakh, so a holder who doesn’t subscribe ends up with a stake 16.7% smaller than before. Per-share earnings shrink the same way until the new money earns something: FY26 profit of ₹301.5 lakh is ₹24.12 a share on the old count and ₹20.1 on the new. Whether the issue was a good idea depends entirely on what the ₹1,200 lakh earns.

🧒 Explain it like I'm 10 (optional — skip if this is already clear)

Five friends own a lemonade stand together. It needs a new fridge, so they decide to make a sixth slice of the stand and sell it cheaply — but only to themselves first. Each friend can buy a bit of the new slice, or give their turn to someone else for a small fee.

If you don’t buy and don’t give your turn away, the stand now has more slices and yours is a smaller part of it. You didn’t get anything for it.

Common mistakes

  • Ignoring the rights letter. Letting REs lapse is the one choice that loses money — it hands your discount to whoever does subscribe. If you don’t want to invest more, selling the REs before RE trading closes is the alternative.
  • Thinking the discount is a gift. A deep discount doesn’t make you richer; the share price adjusts toward the TERP. A rights issue priced at 50% off and one priced at 5% off can raise the same money and be worth the same to a shareholder who takes part.
  • Comparing prices across the ex-rights date without adjusting. Charts, EPS and returns all need the rights adjustment, as with a bonus. The same bonus element that moves the price also moves reported EPS.
  • Not asking why. A company raising equity from its own shareholders is telling you it wants money. Funding growth is one reason; paying down debt it can’t service is another. The letter of offer’s “objects of the issue” section says which — read it the way the DRHP post reads an IPO’s.

Takeaway: a rights issue offers new shares to existing holders first, usually at a discount; the price adjusts, so the discount isn’t free money. Subscribing or selling your rights leaves you whole — letting them lapse is the one choice that quietly costs you.