Rights Issue Explained: Discounted Shares or a Dilution Trap?

Introduction: Discounts in the Stock Market? Yes, Please!

Imagine walking into a store where your favourite item is on sale only for you—no crowd, no coupons, just a personal invite to buy it at a discount.

Sounds amazing, right?

Now imagine your favourite stock doing the same thing. That, dear investor, is what we call a rights issue. It’s the stock market’s version of a “members-only” sale—but with a lot more paperwork and far fewer balloons.

Yet, while we hunt for 50% off deals on Myntra, most retail investors freeze when their demat account flashes a rights entitlement. Panic sets in. “What is this?” “Should I buy?” “Why is this stock asking me for more money?”

Relax. You’re not being scammed. You’re being offered a chance—to buy more shares, at a discount, before anyone else gets access.

In this blog, let’s break down what a rights issue actually is, how it works, and when it’s a smart move… and when it’s just a corporate version of “bhaiya, stock le lo na.”

What is a Rights Issue?

A rights issue is when a listed company gives its existing shareholders a golden opportunity:
Buy more shares at a discounted price before they’re offered to the public.

Think of it as a private stock sale — no influencers, no IPO drama, just you and your current shareholding getting VIP treatment.

But here’s the twist: It’s not free.

Unlike a bonus issue, where you get extra shares just for holding the stock, a rights issue requires you to pay for the new shares — though at a price lower than the current market price. That’s the “discount” everyone’s talking about.

Why is it called a “right”?

Because you have the right, not the obligation, to buy. You can:

• Subscribe: Pay for the shares and increase your holding.
• Ignore: Do nothing, and your ownership gets diluted a bit.
• Sell the entitlement: Yes, your “right” itself can be traded on the stock exchange as a temporary stock (with “-RE” at the end).

In short: A rights issue gives you a front-row seat to the next capital-raising round — you just have to decide whether to buy more popcorn or quietly walk out.

Why Do Companies Go for a Rights Issue?

Let’s be honest — companies don’t just wake up one day and feel generous toward shareholders. If a firm is offering you shares at a discount, it’s because they need money — and they’d rather get it from you than from a grumpy banker charging 12% interest.

So why this route?

1. Business Expansion
   New factories, product lines, entering new markets — all need capital. Rights issues help raise it without taking on debt.
2. Debt Repayment
   When interest costs start eating profits, it’s smarter to raise equity and clean the balance sheet. Shareholders pitch in, and the company saves on future EMI headaches.
3. Regulatory Compliance
   Some companies need to maintain minimum capital or public shareholding levels. Rights issues help tick those boxes.
4. Survival Mode (especially for SMEs)
   Let’s be real — not all rights issues are happy news. Sometimes it’s a distress signal. A struggling company uses this method as a last resort before things get worse.

But why not just raise money from the public?

Because a rights issue is faster, cheaper, and doesn’t dilute existing shareholders — as long as they participate. And companies love saying, “See? We gave you the chance first!”

It’s basically the corporate version of “friends and family round” — just that the ‘family’ here is you, the shareholder.

How a Rights Issue Works

Alright, time to decode the process — because while the idea of buying discounted shares sounds simple, the actual process? Not so much.

Let’s walk through it like a shareholder would:

Step 1: The Announcement

The company announces a rights issue via stock exchange filings. It includes:

• Issue price (usually lower than market price)
• Ratio (e.g., 1:2 means one new share for every two you own)
• Record date (the cut-off date to decide who’s eligible)

Example: If you hold 100 shares and the ratio is 1:2, you’re eligible to buy 50 new shares.

Step 2: Record Date

This is the date you need to own the shares in your demat account to get rights entitlement (RE). If you buy after this date — too bad.

Step 3: Rights Entitlement (RE)

You’ll receive RE shares in your demat account. These represent your right to subscribe. You can:

• Use them to apply for new shares.
• Sell them if you don’t want to apply.
• Buy more RE from the market if you want to apply for extra shares.

Yes, RE itself is a tradable stock — usually with -RE added (e.g., RAJNISH-RE).

Step 4: Subscription Window Opens

You now apply for the number of shares you want (up to your entitlement, or more if allowed). You need to:

• Log into your broker’s portal (Angel One, Zerodha, etc.)
• Choose rights issue section
• Pay the discounted price
• Wait

Step 5: Allotment & Listing

Once the issue closes:

• You’ll be allotted shares (fully or partially depending on demand).
• New shares will be credited to your demat account and listed on the stock exchange.

Done! You now own more shares of the company — hopefully at a good deal.

Rights Issue vs Bonus Issue — Know the Difference

People often confuse a rights issue with a bonus issue because both go to existing shareholders. But these two are as different as Diwali bonus and asking your cousin for a loan.

Let’s break it down:

Feature	Rights Issue	Bonus Issue
🔹 Purpose	To raise fresh capital	To reward shareholders
💰 Payment Required?	Yes — you pay to subscribe	No — it’s absolutely free
🧾 Source of Shares	New shares created and sold	Issued from company’s reserves
🧮 Impact on Shareholding	Can increase if you subscribe	Proportional; no dilution or cost
🧠 Investor Mindset	“Should I invest more?”	“Thanks for the freebie!”
📈 Impact on Share Price	Usually falls near the issue price	Adjusts lower post-issue, but not seen negatively

🎯 TL;DR

• Rights Issue = You invest more money to buy extra shares at a discount.
• Bonus Issue = You get extra shares for free, like a loyalty reward.

In short:
Rights Issue = Optional Investment.
Bonus Issue = Free Gift.

Recent Rights Issues – What’s Cooking in the Market?

Let’s take a quick look at companies currently raising funds via rights issues and what we can learn from them.

Company Name	Issue Price	CMP	Rights Entitlement (CMP)	Rights Ratio	Issue Size (₹ Cr)
Veeram Securities Ltd	₹8.00	₹30.26	₹9.04	1:2	Not Disclosed
U. H. Zaveri Ltd	₹10.00	₹20.39	₹9.37	2:1	Not Disclosed
Bharat Bhushan Share Brokers	₹10.00	₹73.49	₹3.38	1:1	Not Disclosed
7NR Retail Ltd	₹10.00	₹28.01	₹6.56	1:1	Not Disclosed
Sylph Technologies Ltd	₹1.00	₹0.87	₹0.87	15:11	₹48.91 Cr
Praxis Home Retail Ltd	₹10.00	—	—	11:30	₹49.58 Cr
Rajnish Wellness Ltd	₹1.00	₹0.92	—	19:30	₹48.67 Cr
Sattva Sukun Lifecare Ltd	₹1.00	₹1.15	₹0.08	5:2	₹48.00 Cr

What These Examples Show Us

• Crazy Discounts: Most rights issues are priced at steep discounts (like ₹1 vs CMP of ₹28+). Companies want participation, so they lure investors in with bargain pricing.
• High Ratios: Companies offering rights in high ratios (15:11, 19:30) usually need urgent funds — often for survival or expansion.
• Rights Entitlement Trading: If the RE trades at a premium, it shows good investor interest. If it’s close to zero, participation might be weak.

But Not All That’s Discounted is Gold

A discounted rights issue isn’t always a steal:

• If the business is struggling, adding more of that stock to your portfolio could just mean a larger loss.
• If you’re bullish long-term, it’s an opportunity to average down.

What Should You Do in a Rights Issue?

Alright, let’s say a rights issue lands in your lap. You now have three choices:

Option 1: Subscribe to the Rights Issue

When to choose this:

• You believe in the company’s long-term potential.
• The issue price is attractively lower than CMP.
• The purpose of fundraising is solid (expansion, reducing debt, etc.).

Why it’s good:
You get more shares at a discount and avoid dilution of your ownership. Win-win — if the company delivers.

Option 2: Ignore It Completely

When to choose this:

• You no longer believe in the company.
• You don’t want to increase exposure to the stock.
• You’re tight on funds or see better opportunities elsewhere.

But here’s the catch:
If you do nothing, your rights entitlement becomes worthless after expiry. It’s like leaving money on the table.

Option 3: Sell Your Rights Entitlement (RE)

When to choose this:

• You don’t want to subscribe but want to monetize your entitlement.
• RE is trading at a decent premium.

How to do it:
Just like a normal stock — through your broker (look for XYZ-RE).

Pro tip:
If you’re unsure about subscribing, at least sell the RE. It’s free money for a right you won’t exercise.

Final Thought

Don’t act emotionally.
Always check:

• The company’s financial health
• The reason behind the fundraising
• Your own portfolio goals

Because a cheap share of a sinking ship is still… well, sinking.

Final Take – Don’t Miss the Rights, But Get Them Right

A rights issue isn’t a free lunch. It’s more like your favorite thali at half price — but only if you trust the restaurant not to give you food poisoning.

Used wisely, rights issues let you:

• Average down at a discount,
• Increase your stake in quality companies,
• And earn profits even by selling the rights entitlement.

But be careful:

• Not all rights issues are worth subscribing to.
• And blindly buying because it’s “cheap” is a shortcut to wealth destruction.

In short:
If you trust the company, go ahead. If you don’t, sell your RE and walk away richer.

Open a FREE Demat Account with Angel One and never miss another rights issue opportunity again.

FAQs on Rights Issue

Q1: What is a Rights Issue?
A Rights Issue is when a company offers existing shareholders the chance to buy additional shares at a discounted price, usually to raise capital.

Q2: Who can participate in a Rights Issue?
Only existing shareholders holding the company’s shares on the record date can participate.

Q3: Why do companies issue Rights Issues?
Companies raise funds for business expansion, paying debts, or other financial needs without taking loans.

Q4: Is Rights Issue mandatory for shareholders?
No, shareholders can choose to subscribe, sell the rights, or let them lapse.

Q5: How is the Rights Issue price determined?
The company sets a discounted price, usually lower than the current market price, to encourage shareholders to buy.

Q6: What happens if I don’t subscribe to the Rights Issue?
You can sell your rights on the stock market (if they are transferable) or your ownership may get diluted.

Q7: Can Rights Issues affect share price?
Yes, the share price may drop temporarily due to dilution but often recovers after the capital is utilized.

Related Articles

Space Stock: Indian Companies Set to Soar