Rights Issue Explained: Meaning, REs and TERP

Think of a Rights Entitlement (RE) like a limited-time coupon that lands in your demat account because you already own the shares. It is not a share yet — it only gives you the right to apply. The coupon has real value, but only if you use it before it expires or sell it to someone who will.

If you've ever woken up to a WhatsApp note from your broker that says "Subscribe before 28th — rights issue closing" and had no idea what to do with it, this guide is for you. We'll go through the moving parts in plain English, with Indian examples.

What a rights issue actually is

A listed company needs money. It can borrow from a bank, issue bonds (IOUs that pay a fixed interest), sell a large block of shares to one big investor (a preferential allotment), or sell fresh shares to the public at large (a follow-on public offer, or FPO).

The fifth option is to go back to the people who already own its shares and ask them to put in a little more. That is a rights issue.

The word "rights" is the key. You are given the right to buy. You are not forced to buy.

The offer comes attached to the shares you already hold, in a fixed ratio, at a fixed price, for a fixed window of time. After the window closes, the offer expires.

Three things every rights issue spells out. First, the ratio: how many new shares you can buy for each share you already own. Second, the offer price — SEBI's own investor material says these shares are usually offered at a lower price than the market rate, not always, so treat the discount as the norm, never a guarantee. Third, the record date, which is the cut-off for who counts as an existing shareholder.

Rights issue vs bonus issue vs FPO

Beginners mix these up constantly, because all three change the number of shares floating around. The quickest way to keep them straight is to ask one question: does cash leave your bank, and do you get a choice?

A bonus issue is the only one of the three that needs nothing from you. A rights issue and an FPO both ask for your money — the rights issue just asks your existing owners first, and at a set price.

Ratio, price, and the dates that matter

Every rights issue you'll see in India has the same skeleton. Once you've read one, you've read all of them. The company files a Letter of Offer with SEBI, the exchanges publish the schedule, and your broker forwards you the WhatsApp.

Here are the dates you actually need to track, in the order they happen.

• Step 1 · Announcement

  Board approves the issue

  The company's board signs off and discloses the proposed ratio, price band, and indicative timeline. The stock often moves on this news, before any of the actual mechanics kick in.

• Step 2 · Record date

  The eligibility cut-off

  The cut-off date set for the issue. If the shares are in your demat account at the end of this day, you are eligible to receive the rights entitlement. One day prior is the ex-rights date, when the stock starts trading without the right attached.

• Step 3 · REs credited

  Rights Entitlements appear in your demat

  Your Rights Entitlements show up under a separate symbol and ISIN that the exchange assigns for that specific issue — often shown with an "-RE" suffix — and start trading on NSE and BSE like any other security. This is the part most beginners miss: you can sell the right itself for cash, without putting in any more money.

• Step 4 · Issue opens

  Subscribe via ASBA

  The subscription window is set in the Letter of Offer; by rule the issue stays open for a minimum of 7 and a maximum of 30 days. You apply through your bank's ASBA facility — Application Supported by Blocked Amount. The money is only blocked in your account, and actually debited only if shares are allotted to you.

• Step 5 · RE trading closes

  Last day to sell the RE

  The last day to sell your Rights Entitlements on the exchange — on-market renunciation. This usually falls about 3 to 4 working days before the issue closes, not on the same day. Miss it and you can no longer sell the RE in the market.

• Step 6 · Issue closes

  Last day to subscribe

  The final date to apply and pay through ASBA. Any entitlement you have neither used nor sold by now lapses to zero. There is no grace period — which is exactly why Step 5 and Step 6 are two different dates to watch, not one.

• Step 7 · Allotment

  New shares credited

  If your application is successful, the new shares hit your demat account and begin trading on NSE and BSE. The exact listing date is set in the Letter of Offer and exchange notices; under SEBI's 2025 faster-rights framework the whole process, from board approval to listing, is compressed to about 23 working days. The new shares are identical to the ones you already hold.

A simple worked example

First, a word that scares beginners: dilution. Picture the company as a pizza. A rights issue cuts the same pizza into more slices, so each old slice becomes a smaller share of the whole — unless the new money grows the pizza enough to make up for it.

That is all dilution means: more shares in existence, each owning a slightly smaller piece. Now watch it happen with numbers.

Take a fictional company, Bharat Cement Ltd, currently trading at ₹140 on the NSE. The board announces a 1:5 rights issue at ₹100 per share. In plain words: for every 5 shares you already own, you get the right to buy 1 new share at ₹100, even though the open-market price is ₹140.

Say you own 500 shares. Your entitlement is 500 ÷ 5 = 100 new shares. Subscribing in full would cost you 100 × ₹100 = ₹10,000, and your total holding becomes 600 shares.

Once the new shares list, the market price drops to reflect those extra slices. The level it should settle at has a name — the theoretical ex-rights price (TERP). The word theoretical matters: it is a model of where the stock should open, not a promise of where it will actually trade.

Put your holding before and after side by side, and the "no free money" idea becomes obvious.

That ₹80,000 is exactly what you started with: ₹70,000 of original shares plus the ₹10,000 cash you put in. The rights issue did not make you richer. It also did not make you poorer. It just converted cash into shares at a discounted entry price.

This is the cleanest way to understand what a rights issue does. The "discount" looks generous on paper, but it cancels out almost exactly against the dilution. You do not get free money. You get the option to put more capital to work in a company you already own.

Your three options when a rights issue hits

Once the issue opens, you have exactly three choices. The first two are real decisions. The third is what happens when you don't make a decision.

The third option is to do nothing. Don't apply, don't sell the RE, just look the other way. That choice gives you exactly zero.

Your right lapses on the close date and whatever value the RE was trading at on the exchange simply disappears. This is the only choice with no logic behind it. Whichever way you lean on the company, take an action.

When a rights issue is a warning sign

A healthy company sometimes needs capital to fund expansion, and a rights issue can be a perfectly reasonable way to raise it.

Reliance Industries raised about ₹53,124 cr in 2020 through a 1:15 rights issue at ₹1,257 a share, to cut debt during its Jio investment phase — then India's largest-ever rights issue, and shareholders who subscribed did well.

State Bank of India's 1:5 rights issue in 2008, at ₹1,590 a share, raised about ₹16,736 cr to support lending growth. But it only just scraped through to full subscription — a reminder that even a blue-chip rights issue is no sure thing.

A rights issue can also be a quiet way for a struggling company to ask existing shareholders to keep funding the leak.

Vodafone Idea has repeatedly tapped its shareholders to cover AGR dues — adjusted gross revenue dues, a large back-payment Indian telecom operators owe the government — and ongoing operating losses.

A nearby cautionary tale is Yes Bank. Its ₹15,000 cr raise in July 2020 was a follow-on public offer (FPO), not a rights issue — but it shows the same pattern, fresh capital raised right after a near-collapse and forced reconstruction. In both cases the discount looked attractive on the day and very different two years later.

Dilution is the second thing to watch. A 1:1 rights issue doubles the number of shares outstanding. Earnings per share gets cut in half.

If the company can deploy that fresh capital to earn a return higher than its existing return on equity (ROE — the profit it earns for every rupee of shareholders' money), the dilution pays off. If it cannot, you've just helped fund a worse business at your own expense.

Look at why the company is raising money. The Letter of Offer is a public document filed with SEBI for every rights issue. It tells you the use of proceeds in detail, the company's debt position, and the dilution math. Reading it for ten minutes saves more grief than any analyst note.

If the proceeds are going toward capex (capital expenditure — money spent to build capacity, like factories or networks), acquisitions, or paying down expensive debt that frees up future cash flow, the issue is usually a constructive one. If they are going toward "working capital" (the everyday cash a business needs just to keep running) with no clear deployment plan, or toward servicing operational losses, treat the offer letter as a warning, not an invitation.

Here is a quick filter to run on any rights issue before you decide. Pay special attention to whether the promoters are putting in their own share, and to any rise in pledged shares.