What Is a Rights Issue and How Is It Different from an IPO?

You already own shares in a company you believe in. One morning, a notification arrives: the company is offering you new shares at a discount. This is a rights issue. Should you buy, sell your entitlement, or do nothing? The answer matters more than most retail investors realise.

Every few months, a listed company you hold announces a rights issue. The notification lands in your inbox, or shows up in your demat statement, and most retail investors do one of two things: they panic or they ignore it. Both responses can be costly. A rights issue is not a crisis signal and it is not free money either.

It is a formal fundraising mechanism with specific rules, specific timelines, and a set of choices that require a clear head and at least a basic understanding of what is happening. This article explains what a rights issue is, how it works step by step, and why it is fundamentally different from an IPO.

A rights issue is an offer made by a listed company to its existing shareholders to purchase additional shares, typically at a price below the current market price, in proportion to the shares they already hold. The key word is existing. Unlike an IPO which is open to anyone, a rights issue is an exclusive offer. Only shareholders who held shares in the company as of a specific date, called the record date, are eligible to participate.

The legal basis for a rights issue in India comes from Section 62(1) of the Companies Act, 2013, which requires a company proposing to issue fresh shares to first offer them to its existing shareholders in proportion to their current holding. This provision exists to protect shareholders from having their ownership percentage reduced against their will.

“A rights issue is the company saying to its existing shareholders: before we ask anyone else, we are giving you the first chance to buy more.”

 When a company announces a rights issue, it specifies an entitlement ratio. This ratio tells you how many new shares you can buy for every number of shares you currently hold.

Example: How a Rights Ratio Works

You hold 500 shares in Company ABC.

The company announces a rights issue in the ratio of 1:5.

This means: 1 new share for every 5 shares held.

Your entitlement = 500 ÷ 5 = 100 new shares.

If the market price is ₹200 and the issue price is ₹150,

you can buy 100 shares at ₹150 each, saving ₹50 per share.

Total saving vs buying from market = ₹5,000.

The discount to market price is deliberate. It compensates shareholders for committing fresh capital and makes the offer attractive enough to get meaningful participation. In a real example from July 2025, Inox Wind announced a rights issue at a 27 percent discount to the prevailing market price, with an entitlement ratio of 5 shares for every 78 shares held.

In March 2025, SEBI overhauled the rights issue framework through the ICDR Amendment Regulations 2025, with provisions for rights issues taking effect from April 4, 2025. The changes were designed to make the process faster, more transparent, and more capital efficient.

23 Working days to complete a rights issue (SEBI 2025)

90% Minimum subscription required to close the issue

4 to 7 Days that Rights Entitlements trade on the exchange

The most significant change is the 23 working day completion requirement, down from timelines that could previously stretch to several months. Companies no longer need to file a draft letter of offer with SEBI for review in a standard rights issue. Automated validation by exchanges and depositories is also being introduced to reduce errors. These reforms make a rights issue a far more nimble fundraising tool than it used to be.

Here is what happens from the moment a company announces a rights issue to the point where new shares arrive in your demat account.

1. Board Approval and Announcement

The company’s board approves the rights issue, deciding the issue price, the entitlement ratio, and the record date. These details are filed with SEBI and the stock exchanges and made public immediately.

2. Record Date Is Set

Only shareholders who hold shares on this specific date are eligible to participate. If you buy shares after the record date, you will not receive any rights entitlements for that purchase. Crucially, if you held shares on the record date and then sell them afterward, you keep your entitlements.

3. Rights Entitlements (REs) Are Credited to Your Demat Account

Based on your holding on the record date, the company credits Rights Entitlements to your demat account under a separate ISIN, much like a temporary stock. Each RE represents your right to buy one new share at the issue price.

4. RE Trading Window Opens

For 4 to 7 days, your Rights Entitlements can be traded on the NSE or BSE just like ordinary shares. This allows you to sell your entitlements if you do not want to invest more money, or to buy additional REs from the market if you want more than your proportionate share.

5. You Make Your Choice

During the subscription window, which SEBI mandates must be open for at least 7 days and up to 30 days, you choose from the following options (described in detail in the next section). Application is made via ASBA through your bank’s net banking or the registrar’s R-WAP portal.

6. Allotment and Listing

After the subscription window closes, shares are allotted. The new shares are credited to successful applicants’ demat accounts and begin trading on the exchange. If the issue receives less than 90 percent subscription, SEBI regulations require it to be withdrawn and all application money refunded.

Once you receive Rights Entitlements in your demat account, you have four options available to you. This is where most retail investors get confused, so read each one carefully.

• Subscribe in full: Apply for all the shares you are entitled to. Your ownership percentage stays roughly the same as before the rights issue. This makes sense if you are confident in the company and comfortable committing fresh capital.

• Subscribe partially: Apply for some but not all of your entitlements and let the rest lapse. Your ownership percentage will be somewhat diluted but less than if you did nothing.

• Sell your Rights Entitlements: During the RE trading window, sell your entitlements on the exchange for cash. Since REs are credited to you at no cost, selling them gives you an immediate gain. This is the right move if you do not want to invest more but do not want to walk away empty.

• Do nothing and let the entitlements lapse: This is the worst option for most investors. Your entitlements expire worthless after the subscription period closes. Not only do you miss the discounted shares, but your percentage ownership in the company gets diluted as the total share count increases without your participation.

Never Let Your Rights Entitlements Lapse

If you are not willing to invest more money in the company, at least sell your Rights Entitlements during the trading window. Rights Entitlements are credited to you free of cost. Letting them lapse is the equivalent of leaving money on the table. Set a reminder for the RE trading window dates the moment the rights issue is announced.

Here is a scenario that plays out repeatedly in rights issues in India. The promoter subscribes fully to their portion. A large chunk of retail shareholders either miss the notification or choose to do nothing. The company then allots unsubscribed shares to the promoter or other identified investors. The result: the promoter’s shareholding increases significantly, while passive retail shareholders find their stake diluted without having made any active decision.

This is entirely legal. Under the 2025 SEBI amendments, companies can now explicitly allot the unsubscribed portion to identified investors at the issue price, subject to prior disclosure. The mechanism is transparent. But the consequence for an inattentive retail investor is the same: a smaller slice of the company they chose to invest in.

Dilution in Action: A Simple Example

A company has 1,00,000 total shares.

You own 1,000 shares = 1% ownership.

Rights issue ratio: 1:2 (1 new share for every 2 held).

Total new shares issued: 50,000.

Your entitlement: 500 new shares.

If you subscribe: You own 1,500 of 1,50,000 = still 1%.

If you do nothing: You own 1,000 of 1,50,000 = now only 0.67%.

Your percentage ownership has fallen by a third, without you selling a single share.

Both a rights issue and an IPO involve a company issuing fresh shares and raising capital. But the similarities end there. Here is a side by side comparison of how the two differ across every dimension that matters to a retail investor.

Feature	Rights Issue	IPO (Initial Public Offering)
Who Can Apply	Only existing shareholders as of the record date	Any member of the public with a demat account
Company Stage	Already listed on a stock exchange	Unlisted company going public for the first time
Price Setting	Fixed by the board, typically below market price	Determined by book building or fixed price process
Discount to Market	Yes, almost always offered at a discount	No. Issue price can be at or above perceived fair value
Minimum Subscription	90% of issue size required or issue is withdrawn	Varies. Issue can proceed at lower subscription in some cases
Dilution if You Skip	Yes. Your ownership percentage falls	No dilution for public. Existing shareholders may be diluted by the IPO itself
Rights Entitlement	Tradable on NSE or BSE during the RE window	No tradable entitlement. Anyone can apply directly
Application Method	ASBA via net banking or R-WAP portal	UPI method or ASBA via broker app or net banking
Allotment Basis	Proportionate to entitlement held	Lottery for retail in oversubscribed mainboard IPOs
Obligation to Apply	No. It is a right, not an obligation	No obligation. Open to any investor who chooses to apply
Timeline (2025 Rules)	23 working days from board approval	Typically 3 to 4 months from DRHP filing to listing

A rights issue is not automatically a good deal just because the price is discounted. The discount is relative to a market price that itself may be overvalued. Ask yourself these three questions before deciding:

• Why is the company raising money? If the proceeds are going toward genuine growth, capacity expansion, or strategic debt reduction, that is a positive signal. If the purpose is vague, or if a large portion is going toward repaying loans that funded questionable acquisitions, be cautious. Always read the letter of offer carefully.

• Is the company financially healthy enough to justify fresh investment? A rights issue from a fundamentally strong company is an opportunity to buy more at a discount. A rights issue from a company under financial stress can accelerate losses. The act of raising money through a rights issue is neither good nor bad by itself. The condition of the business is what matters.

• Can you afford to invest more? Participation in a rights issue requires committing fresh capital. Never borrow to subscribe. If you cannot comfortably invest the required amount, selling your Rights Entitlements during the trading window is a sensible alternative.

Check whether the promoters are subscribing to their own entitlements. Promoters committing their own money to a rights issue is one of the clearest expressions of confidence in the company’s prospects. Promoters who renounce their entitlements or stay silent should prompt closer scrutiny of the purpose of the fundraise.

A rights issue is one of the most misunderstood corporate actions in the Indian market. It is not a red flag by default and it is not a guaranteed windfall either. It is simply a structured opportunity for the shareholders who were there first to remain there, at a fair price, as the company grows its capital base.

The most important thing you can do when a rights issue is announced is act deliberately. Read the letter of offer. Check the subscription purpose. Decide whether to subscribe, sell your entitlements, or exit the stock entirely. What you must never do is let the entitlements lapse by doing nothing. That is a passive decision with an active financial cost.