3.18What is a rights issue?
1What is it?
A rights issue lets existing shareholders buy new shares directly from the company, usually at a discount to the market price, in proportion to what they already hold.
2Why does it exist?
The company raises money from its existing owners first, so they can keep their ownership % from being diluted.
3Stock market example
Example: a 1:5 rights issue at ₹400 when the market price is ₹500. For every 5 shares you own, you may buy 1 new share at ₹400. You can apply, ignore, or sell your rights entitlement (RE) on the exchange.
4Calculation
Theoretical ex-rights price = (Old shares × Market price + New shares × Issue price) ÷ Total shares
- Hold 5 shares at ₹500 = ₹2,500. Buy 1 at ₹400.
- Total = ₹2,900 for 6 shares.
- ₹2,900 ÷ 6 ≈ ₹483.
After the issue the price tends towards ~₹483, not ₹500.
5Risks
- If you ignore a rights issue, your ownership % gets diluted.
- A discount doesn’t make it a bargain; check why the company needs money.
6Quick revision
- Rights issue = new shares offered to existing holders.
- Usually at a discount.
- You can subscribe, sell your rights, or ignore (and be diluted).
7Knowledge check
Q1. Who can apply in a rights issue?Show answer
Existing shareholders on the record date.
Q2. What happens if you ignore it?Show answer
Your % ownership falls (dilution).
Q3. What is an RE?Show answer
A Rights Entitlement, which can be traded on the exchange.