Rights Issue Explained: Meaning, Process, and How to Apply in India

When a company you’ve invested in announces a rights issue, it can feel confusing. Should you apply, sell your rights, or do nothing? This guide breaks down everything you need to know about rights issues, how they work in India, and how to decide what’s best for you.

What is a Rights Issue?

A rights issue is when a company gives its existing shareholders the right (but not the obligation) to buy additional shares, usually at a discount to the current market price.

For example, if you own 100 shares of Company X, and it announces a 1:5 rights issue, you can buy 1 new share for every 5 existing shares you hold. So, you’ll be entitled to 20 new shares (100 ÷ 5). This is different from an IPO because only existing shareholders get this right.

Why It’s Called a ‘Rights’ Issue

When a company wants to raise money by issuing new shares, it could sell them directly to the public. But if it does that, the ownership of existing shareholders gets diluted, their share in the company becomes smaller.

To prevent this, the company first gives its existing shareholders the right to buy these new shares before anyone else.This gives them a fair chance to maintain their ownership and even increase it if they choose.

In simple words, it's called a rights issue because the company gives existing shareholders the right, not the obligation, to buy new shares before outsiders can.

Why companies issue rights shares

Companies go for a rights issue mainly to raise funds without taking on new debt. It allows them to bring in fresh capital while giving existing shareholders the first chance to invest more at a discount. Common reasons include:

• Business expansion or new projects: To fund growth opportunities or new ventures.
• Reducing debt: To improve the balance sheet and lower interest costs.
• Meeting regulatory capital needs: Especially important for banks and financial institutions.
• Funding acquisitions or working capital: To finance mergers, daily operations, or new investments.

Timelines of Right Issue

When a company announces a rights issue, a few things happen step by step, both for the company and for you as a shareholder.

1. Board Approval and Announcement: The company’s board first approves the issue, deciding the price, ratio, and record date. These details are then filed with SEBI and the stock exchanges.

2. Record Date: This date determines which shareholders qualify for the offer. Only those holding shares on this date are eligible for the rights issue.

3. Rights Entitlements (REs) Credited: Eligible shareholders receive Rights Entitlements (REs) in their demat accounts under a separate ISIN, just like a temporary stock. These show how many new shares you can buy (for example, a 1:5 issue means 1 new share for every 5 you own).

4. RE Trading Window: REs can be traded on NSE or BSE for a few days (typically 4-7). You can sell them if you don’t plan to apply or buy more if you want additional shares.

5. Application and Allotment: You can apply via your bank’s NetBanking (ASBA) or the registrar’s R-WAP portal. Your money stays blocked until allotment. After the issue closes, shares are allotted and credited to your demat account. 

6. Applying for extra shares: You can also apply for more shares than your entitlement. If there are any unsubscribed shares left, they may be allotted to you on a pro-rata basis. If not allotted, the blocked amount will be released or refunded.

7. Listing and Trading: The newly allotted shares start trading on the exchange, and the stock price adjusts based on demand and supply.

In short: A rights issue gives you the first chance to buy new shares at a discount, but it’s up to you to decide whether to subscribe, sell your rights, or skip. INDmoney will notify you before every key date, record date, RE credit, and application deadline, so you never miss your window.

Note: Some rights shares are partly-paid, you pay in installments. You’ll get reminders later for call money. Non-payment can lead to forfeiture.

Rights Entitlements (REs): Your Tradable Rights

When a company announces a rights issue, your entitlement (RE) is credited automatically to your demat account. Once credited, your REs will appear in your INDmoney portfolio under your holdings, you can view, sell, or track them easily within the app.

These REs are tradable, which means you can:
• Use them to apply for new shares, or
• Sell them on the exchange to someone who wants to apply.

If you do nothing, your REs expire worthless after the trading window closes.

For example, if REs are trading at ₹10, you could sell them and pocket that value instead of applying. If you buy REs from the market, you must also apply for new shares before the issue closes, otherwise, you’ll lose the money spent on buying REs.

How to Decide, Subscribe, Sell, or Skip?

• If you believe in the company’s growth: Apply for the right shares, maybe even for extra, if you’re confident.
• If you’re unsure or need cash: Sell your Rights Entitlements (REs) on the exchange and book the value. Since REs are credited free of cost, selling them on the app means instant profit credited to your INDstocks wallet.
• If you don’t trust the company’s outlook: Skip applying, but make sure to sell your REs before they expire.
• Before deciding: Check why the company is raising funds, whether the price is fair, and if promoters are also investing.

How to Apply for a Rights Issue (Retail Investor Guide)

Applying for a rights issue is now almost as easy as applying for an IPO.

Option 1: ASBA (Application Supported by Blocked Amount)

• Log in to your NetBanking → “IPO/ASBA” section.
• Select the rights issue → Enter details (quantity, price, demat).
• Your bank will block the required amount (not debit it).
• After allotment, the blocked amount is either debited or released.

Option 2: R-WAP (Registrar Web Portal)

• Visit the registrar’s website (like KFinTech, Link Intime, or Bigshare).
• Enter PAN, demat, and bank details → Pay online.
• Payment can be made using NetBanking or UPI, depending on what the registrar supports for that specific issue.
• Approve any UPI mandate before the issue close date if you use UPI.

Important:

• UPI is available only through the R-WAP portal, not via the INDmoney app or broker platforms.”
• Some issues may not offer UPI, check the Letter of Offer (LOF) or the registrar’s website to confirm available payment modes.

How to Analyse a Rights Issue Before Investing

Before subscribing, go through the Letter of Offer (LOF) carefully. Here’s what to look for:

• Purpose of funds: Is the money being used for business growth, expansion, or just to repay old debt? Issues raised mainly for survival can be a warning sign.
• Promoter participation: Check if promoters are also subscribing. Their participation signals confidence in the company’s future.
• Pricing and discount: Compare the issue price with the current market price. A reasonable discount is fine, but a steep one may indicate financial stress.
• Financial health: Look at debt levels, profitability, and cash flow. High debt or weak earnings could be red flags.
• Track record: See how the company used funds from past raises, did it actually improve performance or not?

Tax Implications (India)

Taxes can vary based on what you do with your REs and shares.

Key Takeaways

• A rights issue is not a crisis signal by itself, it can also indicate growth funding.
• You don’t have to apply; you can monetise your entitlements.
• Always check how the raised funds will be used, not just the discount.
• Track the record date and RE trading period carefully, they’re short.
• Apply only if the company’s fundamentals justify fresh investment.
• If you skip, sell your REs instead of letting them lapse.

Final Thoughts

A rights issue can be a smart opportunity or a value trap, depending on the company’s intent and your decision. The key is understanding the process, evaluating the purpose, and acting within the short window SEBI allows.

In short: Don’t ignore a rights issue. Analyse it, act smartly, and use your rights wisely.

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Disclaimer

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