Mutual Funds’ Investments

Rights Issue of Shares: A Simple Guide for Retail Investors

What is a Rights Issue?

A rights issue is a way for a company to raise capital by offering additional shares to its existing shareholders. Instead of issuing new shares to the public, the company provides its current investors with the right to buy more shares, usually at a discounted price. This helps the company raise funds while allowing investors to maintain their ownership percentage.

Why Do Companies Offer a Rights Issue?

    Companies choose a rights issue for various reasons, including:

  1. Raising Capital : For fund expansion, new projects, or acquisitions.

  2. Debt Reduction : To repay existing loans and strengthen the company’s financial position.

  3. Supporting Operations : To finance working capital requirements without increasing debt.

  4. Avoiding Market Fluctuations : Unlike public issues, a rights issue is offered directly to existing investors, reducing market-related uncertainties.

How Does a Rights Issue Work?

  1. Proportionate Allotment : The company offers shares in a set ratio. For example, if a company announces a 2:5 rights issue, it means an investor can buy 2 additional shares for every 5 shares they already hold.

  2. Record Date : Only shareholders who own shares on this date can participate.

  3. Discounted Price : Shares are usually offered at a lower price than the current market rate.

  4. Voluntary Participation : Investors can choose to subscribe, sell their rights entitlement, or ignore the offer.

Regulatory Framework and Process

    Rights issues are regulated by SEBI (ICDR) Regulations, 2018 and the Companies Act, 2013.

    Steps for Retail Investors

  1. Check Eligibility : Investors holding shares on the record date are eligible.

  2. Receive Offer Letter : The company sends a rights issue offer detailing the ratio, price, and deadline.

  3. Decide Participation : Investors can:
    • Subscribe to all or part of the offered shares.
    • Sell their rights entitlement on the stock exchange.
    • Ignore the offer (which may dilute their ownership percentage).

  4. Apply and Make Payment : Applications are submitted online or through brokers using ASBA (Application Supported by Blocked Amount).

  5. Allotment and Trading : After processing, allotted shares are credited to the demat account and can be traded in the stock market.

Benefits & Risks:

Benefits :

  • Opportunity to buy additional shares at a lower price.

  • No brokerage or extra charges for participating..

  • Maintains investor’s proportional stake in the company.

Risks :

  • If the company is struggling financially, new shares may decline in value..

  • Non-participation leads to dilution of existing holdings.

  • Investors may not get immediate returns if market conditions are unfavourable.