Rights issue

How the ratio works

A rights issue is quoted as a:b — a new shares offered for every b you hold on the record date. A 2:9 issue means 200 new shares for a holding of 900. The proportion is what matters: if every shareholder takes up their full entitlement, everyone's percentage stake is exactly where it started and the company has new capital.

The issue price is set below the market price to make the offer worth taking. That discount is not a gift — it is the compensation for being asked to put in more money, and it is precisely why letting the entitlement lapse costs you something real.

The three things you can do, and the one you should not

• Apply in full. Your stake is preserved. You pay the issue price for your entitlement.
• Sell the entitlement. Since 2020 SEBI has required the rights entitlement to be credited to your demat account as a separate tradeable instrument, listed under the parent symbol with an -RE suffix. It trades on the exchange for a short window. Selling it recovers some of the value you would otherwise forfeit, while accepting the dilution.
• Apply for more than your entitlement. Most issues let you apply for additional shares, allotted only if other shareholders do not take theirs up.
• Let it lapse. This is the one to avoid by default. You pay nothing, but you receive nothing, your stake is diluted, and the value of the entitlement — which you could have sold — simply disappears. A lapsed entitlement is worth zero.

The entitlement window is short and closes days before the issue itself. If you intend to sell rather than subscribe, the deadline that matters is the entitlement trading window, not the issue closing date.

How to apply

Through ASBA — Applications Supported by Blocked Amount — from your bank's net banking. The money is blocked in your own account and debited only on allotment, so it keeps earning interest in the meantime and is released in full if you are not allotted. The registrar's online portal and most broker apps offer the same route.

The rights entitlement must be in your demat account before you apply, which it will be automatically if you held the shares on the record date. If you bought entitlements on the exchange instead, they arrive in your demat like any other purchase.

What a rights issue says about the company

Less than people assume, and in both directions. A company raising capital from its own shareholders may be funding an expansion it is confident about, or repairing a balance sheet it cannot service. The mechanics look identical; the use of proceeds does not.

The one thing worth reading closely is the stated purpose in the offer document, and whether the company has done this before. Repeated rights issues from the same company, at successively lower prices, describe something a single issue does not.

Rights issue, bonus issue and stock split compared

The middle row is the one that matters. A bonus and a split happen to you; a rights issue requires a decision, and the deadline is real.

Related reading

• Bonus issue vs stock split — the two actions that cost you nothing.
• Bonus and split record dates — what is proposed, confirmed and completed.
• IPO calendar — raising capital from new shareholders instead of existing ones.