Contents
Definition
A Rights Issue is a capital-raising mechanism where a listed company offers its existing shareholders the right to purchase additional shares at a predetermined price — typically at a discount to the current market price — in proportion to their existing holding. The offering is made before any other investors. In India, rights issues are governed by SEBI ICDR Regulations 2018, Chapter IV. A rights issue is described as a 1:4 rights issue at ₹X — meaning 1 new share for every 4 existing shares held at the issue price of ₹X. Rights issues can be renounceable (shareholder can sell the rights entitlement to a third party in the market) or non-renounceable (rights lapse if not exercised by the original holder).
Mechanics & Timeline
- Board approval: Board passes resolution; SEBI filing of Letter of Offer (LoO).
- Record date: Shareholders on record as of the record date are entitled to rights in the specified ratio.
- Rights Entitlement (RE) trading (renounceable): SEBI circular (2020) mandated RE trading on the exchange — holders who don't want to subscribe can sell their entitlement during the RE trading window (typically 3–7 days before and during the issue).
- Issue open / subscription window: Usually 15–30 days; shareholders apply through their broker or ASBA.
- Allotment: If issue is undersubscribed, standby underwriters (if any) or promoters absorb unsubscribed portion. No lottery — shareholders receive exact entitlement.
- Listing of new shares: T+6 from issue close.
Rights issues are generally cheaper to execute than FPOs (no full SEBI prospectus; faster timeline). They are the preferred route for large capital raises where dilution must be offered pro-rata to existing shareholders.
Tax Treatment
- Cost of rights shares: Issue price paid = cost of acquisition for the new shares.
- Renouncement of rights: If a shareholder sells their RE entitlement, the sale proceeds are capital gains. Since the original cost of the rights entitlement is nil (derived from existing holding), the entire sale proceeds are taxable — STCG at 20% (u/s 111A if STT paid) or LTCG at 12.5% (u/s 112A).
- Bonus element: When rights are issued at a significant discount, there is an implicit bonus element — ITAT has held this does not constitute a dividend per Section 2(22).
- Rights lapse: If shareholder lets rights lapse (non-renounceable or failed to sell RE), no tax event occurs.
Investor Protection
- Pro-rata entitlement: Existing shareholders are not disadvantaged by dilution if they subscribe — their percentage ownership remains unchanged.
- RE trading: SEBI's 2020 rights entitlement trading mandate ensures even non-subscribing shareholders can monetise their entitlement rather than suffer pure dilution.
- Disclosure requirements: Letter of Offer must disclose purpose of fund utilisation, risk factors, and detailed financial statements under ICDR Reg. 94.
- Promoter subscription disclosure: If promoters don't subscribe pro-rata, this must be disclosed — triggers mandatory public disclosure of dilution impact on promoter holding (SEBI LODR Reg. 30).
- Maximum issue size: SEBI allows rights issues up to 5× the existing paid-up capital without shareholder approval beyond board resolution (subject to certain conditions).
Worked Example
Reliance Industries Rights Issue — May 2020: India's largest rights issue in history — ₹53,125 crore raised.
- Ratio: 1 share for every 15 shares held as on record date.
- Issue price: ₹1,257 per share (approximately 14% discount to market price at announcement).
- Payment structure: 25% on application, 25% by May 2021, 50% by November 2021 — partly paid shares (PPS) listed on exchanges.
- Subscription: Approximately 1.59x oversubscribed; promoter (Mukesh Ambani family) subscribed their full entitlement.
- Renounceable: Rights entitlements were tradeable on NSE/BSE; shareholders who did not wish to subscribe could sell their REs in the market.
Partly paid shares from the Reliance rights issue were actively traded on NSE/BSE until full payment — a feature permitted under ICDR and the Companies Act.
See Also
Primary Source
SEBI ICDR Regulations 2018, Chapter IV — sebi.gov.in
MintByte is registered with SEBI as an Investment Adviser (ARN-314872) and APMI (APRN-01658). This glossary entry is for educational purposes only and does not constitute investment advice. Subscription to a rights issue involves financial commitment and investors should evaluate their own circumstances.