In the ever-evolving landscape of the Indian stock market, companies often need to raise capital to fund their growth, manage debt, or meet regulatory requirements. One of the prominent ways companies can raise funds is through a rights issue.
What is a Rights Issue?
A rights issue is a way for a listed company to raise additional capital by giving its existing shareholders the right to purchase new shares at a discounted price to the current market rate.
Unlike public offerings where new investors can participate, a rights issue is exclusive to existing shareholders. It allows shareholders to maintain their proportional ownership in the company. For instance, if a shareholder owns 10% of a company, a rights issue allows them to retain their 10% stake by purchasing additional shares in proportion to their existing holding.
Types of Rights Issues
There are primarily two types of rights issues:
a. Renounceable Rights Issue
In this type, shareholders have the option to renounce (transfer or sell) their rights entitlements to someone else, either in the open market or through off-market transactions. This adds liquidity and flexibility for shareholders who may not wish to invest additional capital.
b. Non-Renounceable Rights Issue
Here, the rights offered are non-transferable. If shareholders choose not to subscribe, their entitlement lapses. This type is less common in the Indian context.
Rights issues can also be classified as:
- Fully Paid Rights Issue: The investor is required to pay the entire amount upfront when applying for the rights issue.
- Partly Paid Rights Issue: The payment is made in installments. The company calls for the remaining amount in phases.
Rights Issue Process in India
The rights issue process in India is governed by SEBI (Securities and Exchange Board of India). Here is a step-by-step breakdown:
| Step | Description |
|---|---|
| 1. Board Approval | The company's board of directors must approve the rights issue |
| 2. Filing with SEBI | Files Letter of Offer with SEBI and stock exchanges |
| 3. Record Date | Determines eligible shareholders |
| 4. Issue Announcement | Details price, ratio, timeline |
| 5. Trading of Rights | For renounceable issues, Rights Entitlements (REs) are traded |
| 6. Application Period | Typically 10-15 days for shareholders to apply |
| 7. Allotment & Listing | Shares allotted and listed on exchanges |
Case Studies from the Indian Market
Reliance Industries Limited (2020)
RIL launched India's largest-ever rights issue of ₹53,124 crore. It was a partly paid rights issue, offered in a 1:15 ratio at ₹1,257 per share (against the market price of ~₹1,450). The issue saw overwhelming response and was subscribed 1.59 times. The success of this rights issue boosted investor confidence and was seen as a benchmark for future capital-raising efforts.
Bharti Airtel (2019)
Airtel announced a rights issue of ₹25,000 crore to bolster its balance sheet and invest in network expansion. It was a renounceable issue with a favorable discount. The proceeds were used to reduce debt and improve competitive positioning.
Yes Bank (2020)
As part of its recapitalization, Yes Bank came up with a rights issue to raise capital and restore investor faith.
Should Investors Subscribe?
From an investor's point of view, subscribing to a rights issue can be beneficial if:
- The issue is at a significant discount to the current market price
- You believe in the company's long-term growth
- You want to avoid dilution of your ownership
However, investors must also evaluate:
- The reason for fundraising (debt repayment vs expansion)
- The company's past performance and governance
- Future plans shared in the Letter of Offer
Tax Implications of Rights Issues
- Cost of Acquisition: For rights shares, the cost is the amount paid by the investor.
- Capital Gains: If rights shares are sold later, the difference between sale price and acquisition cost is taxable as capital gains.
- Rights Entitlements (REs):
- If REs are sold in secondary market → Capital gains tax
- If they lapse → No tax event
Investors should maintain proper records and consult a tax advisor.
Risks and Benefits for Investors
Benefits
- Attractive pricing (discounted)
- Opportunity to increase stake
- No brokerage cost if applying directly
- Possible arbitrage (buy REs → apply)
Risks
- Dilution if not participating
- Price may fall below issue price post-listing
- Funds might be raised for non-productive reasons
Key: Due diligence is essential before investing.
Rights Entitlement (RE): Listing and Trading
- Trading Window: REs are listed on the stock exchange and can be traded for a short duration (usually a week)
- Demat Credit: REs are credited to shareholders' demat accounts
- Application Process: Buying REs doesn't guarantee allotment unless you apply for the rights shares separately
- Lapse: If REs are not exercised or sold, they expire worthless
This mechanism ensures liquidity and gives flexibility to shareholders.
Step-by-Step Guide to Applying for Rights Issues
- Check Eligibility – Confirm if you're a shareholder as on record date
- Review Offer Details – Issue price, ratio, payment method
- Choose Application Mode – Online via ASBA (net banking), RTA portals, or physical forms
- Application and Payment – Fill details, enter PAN and DP ID, pay using net banking or UPI
- Track Allotment – After issue closes, track status through RTA
- Shares Credited – Allotted shares will be credited to your demat account and listed on exchanges
Rights Issue vs. Other Fundraising Methods
| Method | Participation | Pricing | Dilution | Regulation |
|---|---|---|---|---|
| Rights Issue | Existing Shareholders | Discounted | Optional | High |
| FPO | Public | Market Price | Yes | High |
| QIP | Institutional Investors | Market-based | Yes | Moderate |
| Preferential Allotment | Select Investors | Negotiated | Yes | Moderate |
| IPO | Public | Book-building | Yes | High |
Rights issues are more inclusive for existing investors and allow control over dilution.
Recent Trends and SEBI Reforms
SEBI has introduced several reforms to make rights issues faster and more transparent:
- Shorter Timelines: The overall process time has been reduced
- Electronic Rights Entitlements (RE): Introduced to simplify trading and reduce paperwork
- Transparency: Strict disclosure norms in the Letter of Offer
- Monitoring: Use of funds raised through rights issues must be disclosed in subsequent reports
These steps have increased the appeal and efficiency of rights issues in India.
Conclusion
Rights issues are a powerful tool for companies to raise capital while giving existing shareholders a fair chance to maintain or increase their stake. They represent a balanced method of fundraising, especially in volatile markets where other sources of capital may dry up.
For Indian investors, understanding how rights issues work, evaluating the offer thoroughly, and knowing how to participate is essential. As SEBI continues to streamline the process, rights issues are expected to become even more popular and accessible.
Whether you're a seasoned investor or a beginner exploring the Indian stock market, keeping an eye on rights issues can open up opportunities for profitable investments at discounted prices.