In the world of corporate finance, a rights issue is a strategic way for companies to raise capital without taking on debt. Whether a company wants to expand, reduce debt, or fund acquisitions, a rights issue can offer a cost-effective solution. This article will explain the process, advantages, challenges, and practical steps to raise funds through a rights issue.
✅ What is a Rights Issue?
A rights issue is a method by which a company offers existing shareholders the opportunity to purchase additional shares directly from the company, usually at a discounted price, in proportion to their existing holdings.
For example, in a 1:4 rights issue, shareholders can buy 1 new share for every 4 shares they already own.
📊 Key Features of a Rights Issue
| Feature | Description |
|---|---|
| Target Audience | Existing shareholders |
| Pricing | Usually at a discount to market price |
| Obligation | Optional (not compulsory to subscribe) |
| Purpose | Capital infusion for growth, debt reduction, etc. |
| Regulation | Governed by SEBI (in India) or respective regulatory bodies |
🧠 Why Choose a Rights Issue Over Other Fundraising Methods?
A rights issue can be more appealing than initial public offerings (IPOs), debt instruments, or private placements. Here’s how it compares:
| Method | Dilution | Cost | Regulatory Compliance | Time Required |
|---|---|---|---|---|
| Rights Issue | Moderate | Low | Medium | Short to Medium |
| IPO | High | High | Strict | Long |
| Debt Issue | None | Medium to High (interest) | Moderate | Medium |
| Private Placement | Low | Negotiable | Low | Short |
🧾 Step-by-Step Process to Raise Funds via Rights Issue
Let’s explore the essential steps a company must follow to raise funds through a rights issue:
1. Board Approval and Planning
The first step is internal planning and board approval. The board decides:
- Total amount to be raised
- Rights entitlement ratio (e.g., 1:4)
- Issue price per share
- Record date (cut-off date to determine eligible shareholders)
2. Drafting the Letter of Offer
This document is a detailed disclosure of the issue and is submitted to the regulatory authority (e.g., SEBI in India) for review.
Contents include:
- Objective of the issue
- Risk factors
- Financials
- Terms and conditions
3. Regulatory Approval
In India, the company must file the Letter of Offer with SEBI and stock exchanges. For listed companies, SEBI’s ICDR (Issue of Capital and Disclosure Requirements) Regulations apply.
4. Announcement and Record Date
A public announcement is made to inform shareholders. The record date determines who is eligible to receive rights.
5. Dispatch of Offer Letter and Application Form
Eligible shareholders receive:
- Letter of offer
- Application form
- Instructions to subscribe via ASBA (Applications Supported by Blocked Amount) or UPI
6. Rights Issue Opens
The issue remains open for a specific period (usually 10-15 working days). Shareholders can:
- Subscribe fully or partially
- Renounce their rights (sell their entitlement)
- Let the rights lapse
7. Allotment and Listing of Shares
After the issue closes:
- Shares are allotted based on subscriptions
- Refunds are made (if applicable)
- New shares are credited to demat accounts and listed on exchanges
📌 Modes of Subscription in a Rights Issue
Shareholders have multiple options during the rights issue:
| Mode | Description |
|---|---|
| Full Subscription | Shareholder buys entire entitled quantity |
| Partial Subscription | Buys less than entitled shares |
| Renunciation | Transfers rights to another investor |
| Lapse | Takes no action; offer expires |
💡 Example of a Rights Issue
Let’s take a hypothetical example:
- ABC Ltd plans to raise ₹100 crore
- Rights issue: 1 share for every 4 held
- Current market price: ₹100
- Rights issue price: ₹80 (20% discount)
If a shareholder owns 1,000 shares, they can buy:
- 250 additional shares (1:4)
- At ₹80 per share
- Total investment: ₹20,000
📈 Advantages of Rights Issue
Rights issues offer several benefits for both companies and shareholders.
For Companies:
- No dilution of control (shares stay with existing owners)
- Low cost of capital
- Faster execution compared to IPOs
- Strengthens balance sheet
For Shareholders:
- Buy shares at a discount
- Opportunity to increase stake
- Tradable rights (in renounceable issues)
⚠️ Risks and Challenges
Despite its advantages, rights issues are not risk-free.
| Risk | Description |
|---|---|
| Under-subscription | If shareholders do not subscribe fully, company may fail to raise target amount |
| Dilution | Non-participating shareholders will see their ownership diluted |
| Market Reaction | Can signal financial trouble if not managed properly |
| Regulatory Delays | Compliance and documentation can slow down the process |
🛠 How Companies Can Ensure a Successful Rights Issue
To maximize success, companies must:
- Communicate clearly: Transparency builds trust.
- Price strategically: The discount must be attractive but not too deep.
- Offer flexibility: Allow renunciation and oversubscription.
- Choose the right timing: Market stability is key.
- Engage merchant bankers: For underwriting and advisory services.
🧾 SEBI Guidelines for Rights Issues (India-Specific)
| Criteria | Regulation |
|---|---|
| Eligibility | Listed company with no regulatory violations in last 3 years |
| Timeline | Completion within 12 months from board approval |
| Minimum subscription | 90% of the issue amount |
| Application method | ASBA (mandatory) for investors other than retail |
🏛 Rights Issue vs Bonus Issue vs FPO
It’s common to confuse a rights issue with a bonus issue or follow-on public offering (FPO).
| Feature | Rights Issue | Bonus Issue | FPO |
|---|---|---|---|
| Purpose | Raise capital | Reward shareholders | Raise capital |
| Cost to shareholder | Yes | No | Yes |
| Shareholder dilution | Possible | No | Yes |
| Pricing | Discounted | Free | Market/Discounted |
| Target | Existing shareholders | Existing shareholders | Public |
🌍 Real-World Examples
✔️ Reliance Industries Rights Issue (2020)
- Amount raised: ₹53,125 crore
- Ratio: 1:15
- Price: ₹1,257 per share
- Oversubscribed 1.59x
✔️ Bharti Airtel Rights Issue (2021)
- Amount raised: ₹21,000 crore
- Ratio: 1:14
- Price: ₹535 per share
🔚 Conclusion
A rights issue is a powerful capital-raising tool that helps companies strengthen their finances while rewarding loyal shareholders. With the right planning, pricing, and transparency, businesses can efficiently unlock shareholder value and fuel future growth.
Whether you’re a startup planning expansion or a listed entity looking to deleverage, understanding and executing a rights issue properly can offer long-term strategic benefits.
🔍 FAQs on Rights Issue
1. Is a rights issue good for shareholders?
Yes, it allows them to buy more shares at a discount and maintain their ownership percentage.
2. Do I have to subscribe to a rights issue?
No, it is optional. You can also sell your rights or ignore them.
3. How does a rights issue affect stock price?
Prices may adjust temporarily due to dilution, but long-term effects depend on how funds are utilized.
4. Can non-shareholders apply for rights issue?
Only if the rights are renounceable and transferred to them.