When Companies need fresh capital, they don’t always run to banks or open the doors to new investors. Sometimes, they turn back to the people who already trust them – the existing shareholders. A rights issue simply put is a company offering its current shareholders the chance to buy extra shares, usually at a price lower than the market, and only for a limited time. For the business, it is a way to raise money without taking on more debt. For investors, it’s an opportunity that others in the market don’t get right away.
How Rights Issues Work in Practice
When a rights issue is announced, shareholders receive something called Rights Entitlements (REs). These are allocated based on their current ownership. For instance, if someone owns 100 shares and the company announces a “1-for-5” rights issue, they can buy 20 more shares (1 new share for every 5 owned).
The usual process goes like this:
- The company announces the rights issue and sets a record date—only people holding shares on that date get REs.
- Shareholders get Rights Entitlements, which they can either use to buy new shares at the discounted price or sell to someone else.
- There’s a fixed window to act. If not used, the rights lapse and become worthless.
This flexibility is one of the nicest things about rights issues. Not every shareholder wants to increase their holding, but with the option to sell the rights, they can still get some value from the offer.
Advantages of Rights Issues
For companies:
- Quick, cost-effective way to raise funds without taking on debt.
- Helps maintain financial stability or expand operations without lots of paperwork.
- Can strengthen the balance sheet or fund projects, mergers, and acquisitions.
For shareholders:
- Opportunity to increase holdings at a discount—paying less for the same shares than on the open market.
- Can trade or sell the rights if they don’t want to invest more.
- Helps protect their percentage of ownership if they take up all rights offered.
Risks and Drawbacks
Rights issues do come with a few drawbacks:
- More shares issued can lower the value of each share (earnings per share) — a phenomenon called “dilution.”
- If many existing shareholders don’t participate, and the company can’t raise enough capital, problems may arise.
- Stock price may drop temporarily after a rights issue since there are more shares in circulation.
What are Rights Entitlements (REs)?
A key term here is Rights Entitlement. REs are the rights allocated to shareholders during a rights issue. They are credited to the shareholder’s account and sometimes can be traded separately from the shares for a fixed period. If shareholders don’t exercise or sell them, the entitlement lapses and becomes worthless.
Example: suppose a shareholder receives 10 REs based on the company’s ratio. They can use them to buy 10 additional shares at the discounted price, sell the REs to someone else, or just ignore them—but ignoring means losing the potential benefit.
Significance in Banking Operations
If you’re working as an analyst, a banking operations manager, or even in an advisory role, knowing how rights issues work isn’t just theory—it’s practical. You’ll need to see both the mechanics and the impact, whether you’re guiding investor clients or simply checking the financial strength of a company.
Plenty of banking courses online touch on this. FinX offers corporate training modules that include capital raising, rights issues, and related securities in their syllabus. The modules don’t stop at definitions—they go into things like share capital structures, equity market practices, regulations and investor rights, so participants actually build skills that apply in day-to-day finance jobs.
Rights Issues vs Public Offerings
It’s helpful to compare rights issues with other ways of raising capital, like public offerings.
Feature | Rights Issue | Public Offering |
Who can buy? | Only existing shareholders in a fixed ratio | Anyone, including general public |
Price | Discounted below current market price | At or above market price, sometimes higher |
Impact on ownership | Protects existing shareholder percentage | Existing shareholders can see dilution |
Speed & regulatory | Faster, cheaper, fewer compliance checks | More paperwork and scrutiny |
Tradability | Rights can be traded | No direct equivalent—you buy new shares |
How to Participate in a Rights Issue
Participating is generally straightforward:
- Check if Rights Entitlements have been credited (usually in your demat account).
- Decide whether to exercise (buy shares), sell the entitlement, or let it lapse.
- If buying, pay the subscription price before the deadline.
- If selling, do so within the trading window.
- If neither shares nor rights are acted on, the entitlement lapses.
Rights issues show the dynamic between companies and investors, providing a way to raise funds while rewarding existing shareholders. India has seen some big rights issues, like Reliance Industries Limited (RIL) in 2020, which brought Rights Entitlements into broader attention. Whether it’s to raise funds, grow the business or reward loyal investors, knowing about Rights Issues and Rights Entitlements is now essential for anyone in banking and finance.
