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What is a Rights Issue?

•6 min read•by Angel One
A rights issue is a corporate action wherein a listed company offers existing shareholders a right to buy new shares at a discounted price, generally to raise equity capital without increasing debt.
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A rights issue is a method used by companies to raise additional capital by offering new shares to existing shareholders at a discounted price. Instead of approaching new investors or increasing debt, the company gives its current shareholders the first opportunity to invest more in the business. 

Shareholders can choose to buy the additional shares, buy partly, sell their rights (if tradable), or ignore the offer. While this process helps companies raise funds, it may also increase the total number of shares and affect earnings per share. Understanding what is a rights issue is important for investors who want to make informed decisions during corporate actions. 

Key takeaways 

  • A rights issue offers new shares to existing shareholders in a fixed ratio at a discounted price to raise equity capital. 

  • Shareholders can subscribe fully, partly, sell their entitlement (if allowed), or ignore the offer. 

  • Companies use rights issues for expansion, debt reduction, working capital, or strategic investments. 

  • As per SEBI’s revised framework, effective April 7, 2025, rights issues in India must now be completed within 23 working days from board approval. 

How Does a Rights Issue Work?

  1. The company announces the offer, detailing the ratio of new shares to existing shares, the offer price, and the record date. 

  1. Shareholders eligible as of the record date can subscribe fully, partially, or not at all. 

  1. If permitted, shareholders can also sell their rights entitlement in the secondary market to other investors. 

  1. After the subscription period ends, the new shares are allotted and credited to shareholders’ demat accounts, while the funds raised are utilised for the stated purpose. 

  1. SEBI's amended regulations (April 2025) now require stock exchanges and depositories to assist in more rapid validation, monitoring, and allotment, allowing the full rights issue process to be completed in a shorter time frame. The subscription window is typically set to 7 to 30 days. 

Read More: What Is Demat Account? 

Why Do Companies Offer Rights Issues to Their Shareholders? 

  1. A rights issue enables a company to acquire equity capital from its current shareholders in a proportional and organised manner, preserving ownership balance and minimising dependency on external funding sources. 

  1. It enables companies to raise capital from existing shareholders without significantly impacting their ownership structure. 

  1. It is a faster and more cost-effective option than public offers since the regulatory processes under SEBI's ICDR framework are easier. 

  1. It provides companies with rapid access to finance when they need it, without having to go through protracted fundraising processes. 

  1. It enables companies to prefer equity capital over new borrowing, particularly when balancing leverage and interest expenses. 

  1. Shares are sold at a discount to stimulate participation while assuring proportional distribution to shareholders. 

When Should an Investor Participate in a Rights Issue? 

Investors should consider participating in a rights issue under the following conditions: 

  1. Company expansion: If the funds are allocated to growth-oriented projects, participating may yield long-term rewards. 

  1. Eligibility: Shareholders holding shares before the ex-date qualify for the rights issue. It’s important to check the record date and ensure eligibility. 

  1. Discounted offer: A rights issue priced below the market price gives shareholders an arbitrage worth considering based on market conditions. 

  1. Offer Price Comparison: When the offer price is lower than the prevailing market price, shareholders can evaluate the theoretical benefit based on the price difference. 

  1. Record date: The day on which the company assesses its records to check which shareholders qualify for the rights issue is called the record date. 

  1. Ex-date: The ex-date is when shares start trading without the rights entitlement. As India follows a T+1 settlement cycle, shares bought on or after the ex-date do not settle before the record date, making the buyer ineligible. Exchanges set the ex-date to ensure only settled shareholders qualify. 

Types of Rights Issues 

A right issue of shares can be structured in different formats depending on the company’s capital needs and regulatory requirements. The 

whether shareholders can transfer their entitlement and how the company ensures full subscription. Below are the main types of rights issues: 

  1. Traditional Rights Issue 

This is the standard format. Shareholders receive the option to purchase additional shares in a fixed ratio, such as 1:4 or 1:5, at a price lower than the prevailing market value. The allocation is proportional to existing holdings. 

  1. Renounceable Rights Issue 

In this type, shareholders can sell or transfer their rights entitlement in the stock market during a specified trading window. This allows them to benefit even if they do not wish to subscribe. 

  1. Non-Renounceable Rights Issue 

Here, the entitlement cannot be transferred. Shareholders must either subscribe to the offered shares or allow the rights to expire unexercised. 

  1. Standby Rights Issue 

Under this structure, an underwriter agrees to purchase any unsubscribed shares. This ensures the company raises the targeted capital amount. 

  1. Partially Renounceable Rights Issue 

In certain cases, shareholders may subscribe to a portion of their entitlement and sell the remaining part, offering both flexibility and participation. 

Features of a Rights Issue

  1. Rights issues are offered exclusively to existing shareholders, ensuring they get the first opportunity to purchase additional shares. 

  1. Rights shares are offered in a fixed ratio to the shares already held. For example, in a 1:5 rights issue, shareholders can purchase one new share for every five shares they own. 

  1. The rights shares are typically priced lower than the current market price, making them an attractive investment. 

  1. Shareholders can decide whether to subscribe to the rights issue, subscribe partially, or let the offer lapse. 

  1. In many cases, shareholders can trade their rights entitlement on the stock exchange, providing flexibility to those who choose not to participate. 

  1. Only shareholders holding shares before the ex-date are eligible. Shares bought on or after the ex-date are not entitled to the rights issue as the settlement would occur after the record date. 

  1. A rights issue raises funds without increasing debt, which may improve the company’s debt-to-equity ratio if the proceeds are used to reduce debt. 

  1. Issuing additional shares increases the total share count, potentially diluting earnings per share (EPS) and voting power for non-participating shareholders. 

Reasons for a Right Issue of Shares

To understand what is the right issue of shares, it is equally important to know why companies choose this route. A rights issue allows businesses to raise equity capital from existing shareholders without increasing debt. The funds can be used for different financial and strategic needs, depending on the company’s situation. 

  1. Capital Expansion Companies may issue rights to fund new projects, expand operations, or enter new markets. This helps support long-term growth without relying on external borrowings. 

  1. Debt Reduction funds raised through a rights issue can be used to repay existing loans. Lower debt can reduce interest costs and improve the company’s financial stability. 

  1. Strategic Investments a company may raise capital to acquire businesses, invest in new technology, or strengthen its competitive position within the industry. 

  1. Working Capital Requirements Rights issues can help meet short-term operational needs such as inventory purchases, salary payments, or managing cash flow gaps. 

  1. Research and Development Businesses focused on innovation may use the proceeds to develop new products or improve existing offerings to stay relevant in changing markets. 

  1. Market Conditions and Opportunities Favourable market sentiment may encourage companies to raise funds when investor participation is likely to be strong. 

  1. Shareholder Dilution Management Although new shares increase the total share count, existing shareholders get the first opportunity to maintain their ownership percentage by subscribing. 

What Are the Benefits of Participating in a Rights Issue? 

  1. Shareholders can purchase shares at a discounted price, increasing their stake in the company. 

  1. Existing shareholders can maintain their ownership percentage and voting rights by subscribing to the issue. 

  1. A successful rights issue can reduce debt levels and improve financial health, benefiting shareholders in the long run. 

  1. Offering shares at a discount may signal confidence in the company’s future prospects. 

Example of a Rights Issue

A recent rights issue example (as of February 2026) is Presstonic Engineering Limited’s rights issue announced in February 2026. The company set a ₹26.98 crore rights issue at a price of ₹35 per share with a 1:1 entitlement, allowing eligible shareholders to apply for one new share for every share held as of the record date.  

The record date was January 29, 2026, and the subscription period was February 6 to March 6, 2026, with the ability to renounce (sell) rights entitlements on the market during the renunciation window. 

What Are the Disadvantages of a Rights Issue?

  1. The increase in the number of shares reduces earnings per share if the raised funds do not generate proportional profits. 

  1. Rights issues by financially distressed companies may be seen as a sign of weakness, impacting share prices negatively. 

  1. Shareholders who do not participate may see their ownership percentage and voting power reduced. 

  1. An increase in share supply can lead to a drop in share value, especially if investor sentiment is weak. 

Conclusion 

A rights issue of shares is a structured way for companies to raise additional capital by offering new shares to existing shareholders at a discounted price. It allows businesses to fund expansion, reduce debt, or strengthen their financial position without increasing borrowings.  

At the same time, it increases the total number of shares, which may affect earnings per share if not supported by growth. For investors, the decision to participate should depend on the company’s purpose for raising funds, its financial health, and the attractiveness of the offer price.  

FAQs

A rights issue requires shareholders to pay for additional shares, while a bonus issue offers free shares in proportion to existing holdings. Rights issues raise funds for the company, whereas bonus issues do not.
Yes, if the rights are tradable, shareholders can sell their entitlement in the secondary market. This allows them to monetise their rights without subscribing to the issue.
Yes, a rights issue can dilute share value in the short term due to an increase in the total number of shares. However, if the funds are used effectively, it can enhance long-term shareholder value.
Shareholders should assess the company’s financial health, purpose for raising funds, and the discounted price compared to market value. Understanding these factors ensures informed decision-making.

Companies undertake a rights issue of shares to raise equity capital from existing shareholders. The funds may be used for expansion, debt repayment, or working capital needs. This approach helps avoid increasing debt levels. 

A right issue can lead to short-term price adjustments due to an increase in share supply. The market may also react to the reason behind the fundraising. Long-term impact depends on how effectively the raised funds are used. 

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