The main purpose of the rights issue is to increase additional share capital from the existing shareholders. The company might take this path if they have decided not go public to raise additional capital.
Existing shareholders can participate in the rights issue in the proportion of their shareholding.
For example: if a company has decided to go for 1:2 rights issue, it means every 1 for 2, every 2 shares a shareholder owns, he can subscribe to 1 additional share.
Remember, subscriptions of new additional shares will not be free. To get the new shares issued, you need to pay the price that the company asked for.
Obviously companies will go for the rights issue at a price which will be lower than the prevailing market price, but it depends on the company.
In bonus issues, you need not pay anything as the company will be issuing it for free out of its own reserve. In the rights issue, existing shareholders need to pay for the additional shares.
It’s up to the shareholder to participate in the rights issue. In case of bonus shares, you need not do anything, automatically shares will be allotted to you.
As an existing shareholder, if you do not want to participate in rights issue offered to you, then you can sell your rights entitlement in the open market. If you don’t avail your benefit of rights entitlement it will lapse after the offer is closed.
Recent popular rights issue in India
| Company | Rights Ratio |
| Indian Hotels Company Ltd | 1:9 |
| Bharti Airtel Ltd | 1:14 |
| L&T Finance Holdings Ltd | 17:74 |
| Sundaram Finance Holdings Ltd | 23:49 |
| Asian Granito India Ltd | 19:29 |
| Reliance Industries Ltd | 1:15 |
Reliance’s rights issue size was Rs 53,125 crore. It was the largest ever rights issue in India and world’s largest rights issue by a non-financial company in the last 10 years.
When a company go for rights issue
Rights issue is a corporate action taken at a higher management level to restructure the company’s capital requirements.
Remember, in rights issue offerings, companies grant shareholders the right, but not the obligation, to buy new shares at the offered price.
In general a company can go for rights issue for following reasons;
- to raise additional capital when they really need it,
- to pay own debt when they are unable to borrow more money,
- to meet its current financial obligations, or
- to raise extra capital to fund expenditures designed to expand the company’s business, such as acquisitions or opening new facilities for manufacturing or sales.
How rights issue work
Let us assume you own 1000 shares @ 100 per share of XYZ company limited. The company wants additional capital for its expansion and to cover its present debt obligations.
Therefore, they have decided to go for a rights issue to raise 90 Crores by issuing 1 Crore additional shares at the rate of Rs. 90 per share.
The right ratio for this offer is 1:10. In other words, for every 10 shares of XYZ company limited you hold, the company is offering you another 1 share at a discount price of Rs. 90 per share.
Now, as a shareholder you have following options;
- subscribe to the rights issue in full,
- ignore your rights, or
- sell your rights entitlement to someone else in open market
If you have chosen to subscribe to the rights issue in full, then as per the offer, you can get 100 shares of XYZ company limited at the discounted price of Rs. 90 per share.
