What is a Rights Issue?
A rights issue is a corporate action where the company offers you the right to buy more shares. This means, the company is offering you a chance to buy additional shares in proportion to your holdings, at a discounted price. The existing shareholders get exclusive rights to buy more shares. This is done in ratios.
A right issue is a way by which a listed company can raise additional capital. However, instead of going to the public, the company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing shareholders..
If the shareholder is eligible for the rights issue, their demat account will be credited with right entitlements (RE’s). RE’s can be used to apply for the rights issue or can be transferred by selling them on the market. If they are not sold or used for applying for the rights issue, they will eventually lapse.
In the case of Rights Issue, you only get these rights if you own the shares on or before a specified record date, which the company announces. Companies prefer rights issues to normal stock issues because this method is non-dilutive. As existing shareholders are offered a bigger stake, new shareholders don’t dilute and reduce their ownership.
To know more about Rights Issue, get the SEBI FAQs here, NSE FAQs here and BSE FAQs here.