A rights issue is an offer of new shares made by an already listed company to its existing shareholders, in proportion to what they already hold, usually at a discount to the market price. For example, a company might offer one new share for every five held. Shareholders have the right but not the obligation to subscribe, and the right itself, called a rights entitlement, can be traded on the exchange or renounced in favour of someone else during the offer period. A rights issue is a way for a company to raise capital without bringing in new owners, and it avoids the dilution of existing investors if they take up their entitlement. If a shareholder does not subscribe or sell the entitlement, their percentage holding falls and the entitlement lapses. Rights issues are different from IPOs because the company is already listed and the offer is restricted to a record date list of holders. Applications are made through ASBA or the registrar’s portal, and the entitlements are credited to the demat account with a temporary ISIN. Companies often use them to repay debt or fund expansion, and investors should judge the use of funds as they would with an IPO.
Example: A company announces a 1:5 rights issue at Rs 80 when its share trades at Rs 100. If you hold 100 shares, you can buy 20 new shares at Rs 80 each, paying Rs 1,600, or sell the entitlement.