Definition
An offer by a company to its existing shareholders to subscribe for additional shares in proportion to their current holdings at a specified price — typically at a discount to the market price — preserving existing shareholders' proportionate ownership.
A rights issue under Section 62(1)(a) of the Companies Act, 2013 offers existing shareholders the right (but not the obligation) to subscribe for additional shares in proportion to their current holdings. The purpose is dual: (a) capital raising for the company; and (b) preservation of existing shareholders' proportionate ownership. Shareholders who do not wish to exercise their rights can typically renounce them to others (subject to company policy). Listed companies follow SEBI ICDR Regulations for rights issues. The 'Rights Entitlement Ratio' determines how many new shares each shareholder may subscribe for per existing share held (e.g., 1 new share for every 4 held). Rights issues are often at a discount to motivate subscription.
Statutory Definition
Section 62(1)(a), Companies Act, 2013: 'Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered — (a) to persons who, at the date of the offer, are holders of equity shares of the company, in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely: (i) the offer shall be made by notice specifying the number of shares offered and limiting a time not less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined.'
Etymology & Origin
From 'rights' (entitlements, existing shareholders' pre-emptive right to participate in new share issues) + 'issue' (a new issuance of shares). A 'rights issue' issues new shares and offers the 'right' of first subscription to existing shareholders — before any outside party.
Full Legal Analysis
Rights Issue: Preserving Shareholder Proportionality
When a company raises capital by issuing new shares, existing shareholders face dilution — their percentage ownership falls if they don’t participate proportionately. The rights issue is the anti-dilution mechanism: existing shareholders get first right to buy new shares in the same proportion as their existing holding. Those who exercise maintain their percentage; those who don’t may be diluted (but receive the value of their rights if they renounce them).
The Rights Entitlement Ratio
The rights entitlement ratio (e.g., '1:4' — 1 new share for every 4 existing shares held) determines how many new shares each shareholder may buy. A shareholder with 400 shares in a 1:4 rights issue gets the right to buy 100 new shares. If the shareholder exercises their full right, their holding becomes 500 shares and their percentage ownership is maintained. If they don't exercise, they can: (a) renounce (sell) their rights entitlement to others at market price; or (b) let the rights lapse and face dilution. The rights entitlement itself has value if the rights issue price is below market — the difference (subscription value) can be realised by selling the right.
Renunciation and Rights Trading
Listed companies' rights entitlements can be traded on the stock exchange (SEBI has enabled this). The 'Rights Entitlement' (RE) is listed and traded — allowing shareholders who don't want to invest more to sell their REs to others who want additional shares. This was a major improvement for shareholders: previously, unexercised rights simply lapsed; now they can be monetised. RE trading has significantly improved the economics and participation in rights issues.
“A rights issue is the most shareholder-friendly fundraising mechanism — existing investors are given the first right to maintain their proportionate stake, at a price that typically acknowledges their existing commitment with a discount. It is the company saying: existing shareholders get preferential access to new capital, before we go to the market.”
This Term in Indian Statutes
Companies Act, 2013, 2013
"Where a company proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to existing equity shareholders in proportion to the paid-up share capital on those shares, by notice specifying the number of shares offered and limiting time not less than fifteen days for acceptance."
Rights issue: pre-emptive right for existing shareholders; proportionate offer; 15-30 day acceptance window; renunciation allowed; RE tradeable on exchange for listed companies
