Rights Issue Explained: Everything You Need to Know
- How Does the Ratio Work?
- What Is a Rights Entitlement (RE)?
- Your 4 Options as a Shareholder
- How Do You Apply?
- The Timeline, Start to Finish
- How Is It Taxed?
- Rights Issue vs. Bonus Issue vs. FPO
- Common Mistakes to Avoid
- Conclusion
- Frequently Asked Questions
A rights issue is an offer by a listed company that allows its existing shareholders to buy additional shares in proportion to their current holdings, usually at a price lower than the prevailing market price. Unlike an IPO or QIP, only shareholders whose names appear in the company’s records as of the specified record date are generally eligible to participate. In this guide, we’ll explain how a rights issue works, who can apply, and the key things you need to know.
💡 Quick Answer
A rights issue lets existing shareholders buy additional shares in proportion to their holdings, usually below the market price, based on an entitlement ratio (for example, 1:5). Eligible investors can subscribe fully or partly, renounce (sell) their Rights Entitlements (REs) on the exchange, or let them lapse. Applications are made through ASBA, and under SEBI’s ICDR framework the process is generally completed within about 23 working days of board approval.
How Does the Ratio Work?
Every rights issue specifies an entitlement ratio. For example, a 1:5 rights issue entitles eligible shareholders to buy 1 new share for every 5 shares they hold. If you own 100 shares of XYZ Ltd., a 1:5 rights issue would entitle you to apply for 20 new shares at the rights issue price. Your entitlement is determined based on your shareholding as of the record date, after which you can decide how to exercise your entitlement.
What Is a Rights Entitlement (RE)?
Following SEBI‘s 2020 framework for rights issues, eligible Rights Entitlements (REs) are credited to shareholders’ demat accounts under a separate ISIN. Subject to the applicable exchange trading window, Rights Entitlements (REs) may be bought or sold on the stock exchange during the permitted trading period.
Your 4 Options as a Shareholder
Eligible shareholders generally have four options. First, apply for their full entitlement. Second, apply for only part of their entitlement. Third, renounce (sell) some or all of their Rights Entitlements (REs) on the stock exchange during the applicable trading window. Fourth, apply for their full entitlement and also request additional shares, which may be allotted subject to the terms of the issue and the level of subscription. If no action is taken within the applicable timelines, the Rights Entitlements (REs) generally lapse after the issue closes.
How Do You Apply?
Eligible shareholders can apply through ASBA (Application Supported by Blocked Amount) using their bank’s ASBA-enabled net banking facility or through other application mechanisms, such as the registrar’s platform, where applicable. Under the ASBA process, the application amount is blocked in the bank account and debited only to the extent of the shares allotted. Upon allotment, the Rights Entitlements (REs) and allotted shares are credited to the eligible shareholder’s demat account, including a demat account maintained through the Navia All in One App.
The Timeline, Start to Finish
Under the SEBI ICDR framework (effective March 2025), companies are generally required to complete the rights issue process within 23 working days of board approval. As part of this timeline, the letter of offer is generally filed on T+1, exchange approval is expected by T+3, Rights Entitlements (REs) are generally credited to eligible shareholders’ demat accounts by T+9, RE trading typically opens by T+14, and allotment is generally completed by T+23, subject to the applicable regulatory framework and issue-specific timelines. Investors should monitor the record date and issue schedule communicated by the company to ensure timely action.
How Is It Taxed?
Where Rights Entitlements (REs) are renounced (sold), the tax treatment is governed by the applicable provisions of the Income-tax Act, 1961. The cost of acquisition and resulting capital gains are determined in accordance with the prevailing tax laws. Investors should consult a qualified tax adviser regarding their individual tax position.
Rights Issue vs. Bonus Issue vs. FPO
| Rights Issue | Bonus Issue | FPO | |
|---|---|---|---|
| Who applies | Existing shareholders | Existing shareholders | General public |
| You pay? | Yes, at the issue price | No | Yes, at offer price |
| Tradable right | Yes (RE) | No | Not applicable |
Common Mistakes to Avoid
- ❌ Don’t let your Rights Entitlement (RE) lapse if you do not intend to subscribe. Subject to the applicable trading window, you may consider renouncing (selling) your RE instead.
- ❌ Don’t miss the applicable trading window. Rights issues generally follow a defined timeline, so it’s important to monitor the record date and issue schedule communicated by the company.
- ❌ Don’t assume the tax treatment of renounced REs. The tax treatment of Rights Entitlements (REs) is governed by the applicable provisions of the Income-tax Act, 1961. Investors should consult a qualified tax adviser regarding their individual tax position.
Conclusion
In short, a rights issue gives existing shareholders — including those holding shares through the Navia All in One App — the option to subscribe, renounce (sell) their Rights Entitlement (RE) during the applicable trading window, or take no action. Investors should monitor the record date and issue timelines communicated by the company.
Key Takeaways
- A rights issue lets existing shareholders buy additional shares in proportion to their holdings, usually below the market price, based on an entitlement ratio (for example, 1:5).
- Rights Entitlements (REs) are credited to your demat account under a separate ISIN and can be subscribed, renounced (sold) on the exchange, or left to lapse.
- Applications are made through ASBA, where the amount is blocked and debited only for the shares actually allotted.
- Under SEBI’s ICDR framework, the process is generally completed within about 23 working days of board approval — track the record date and issue schedule.
- Compare it with other corporate actions: a bonus issue gives free shares, while fresh issue vs OFS in an IPO and stock mergers reshape a company’s share capital in different ways.
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Frequently Asked Questions
Who is eligible for a rights issue?
Eligible shareholders whose names appear in the company’s records as of the specified record date may participate in the rights issue, subject to the terms and conditions of the issue.
What if I don’t respond at all?
If no action is taken within the applicable timelines, Rights Entitlements generally lapse after the issue closes.
Can I sell my Rights Entitlement instead of buying shares?
Subject to the applicable trading window and exchange rules, Rights Entitlements (REs) may be renounced (sold) on the stock exchange under a separate ISIN.
How is a renounced RE taxed?
The tax treatment of renounced Rights Entitlements (REs) is governed by the applicable provisions of the Income-tax Act, 1961. Investors should consult a qualified tax adviser regarding their individual tax position.
How long does the process take?
The rights issue process is generally completed within 23 working days of board approval, subject to the applicable SEBI regulations.
Is a rights issue the same as a bonus issue?
No. In a bonus issue, eligible shareholders receive additional shares without payment. In a rights issue, eligible shareholders may subscribe to additional shares at the issue price specified by the company.
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