What is Right Issue of Shares?

Introduction

In the ever-evolving world of finance, companies often look for ways to raise funds without taking on new debt. One of the most common and shareholder-friendly ways to do this is through a Right Issue of shares.
It allows existing shareholders to purchase additional shares of the company at a discounted price — before those shares are offered to the public.

Let’s understand what a Right Issue of shares means, its features, examples, and how it benefits both companies and investors.

What is a Right Issue of Shares?

A Right Issue of shares is a corporate action where a company gives its existing shareholders the right (but not the obligation) to buy additional shares in proportion to their current holdings.
This means if you already own shares of a company, you get the first opportunity to increase your stake before new investors come in.

Usually, these shares are offered at a discounted price, making it a lucrative opportunity for shareholders.

Example of a Right Issue

Let’s take a simple example:

Suppose a company announces a 1:5 right issue at ₹200 per share, and the current market price is ₹250.
This means:

• For every 5 shares you own, you can buy 1 additional share at ₹200.
• If you own 100 shares, you can buy 20 more shares (100/5 = 20) at ₹200 each.

Here, you get to increase your holdings at a lower cost, while the company gets fresh capital for its operations or expansion.

Features of a Right Issue of Shares

1. Exclusive to Existing Shareholders
   Only current shareholders can participate in the right issue based on their existing shareholding ratio.
2. Offered at a Discounted Price
   The issue price is generally lower than the market price to make it attractive for investors.
3. Proportionate Allotment
   The number of shares offered depends on the shareholder’s current holding (e.g., 1:5, 2:10, etc.).
4. Non-Obligatory Participation
   Shareholders are not bound to subscribe; they can either apply, sell their rights, or ignore them.
5. Fundraising Without Debt
   Companies prefer right issues as it helps them raise capital without increasing debt obligations.
6. Tradable Rights
   In some cases, these rights are renounceable, meaning shareholders can trade or sell their rights in the stock market.
7. Time-Bound Process
   The offer is available for a limited period, usually a few weeks.

Why Companies Issue Right Shares

Companies go for a right issue to:

• Raise funds for expansion or new projects
• Repay existing debt
• Strengthen their balance sheet
• Improve liquidity without affecting the ownership structure drastically

Benefits to Shareholders

• Opportunity to invest at a discount
• Maintains ownership proportion in the company
• Potential for long-term gains if the company performs well post-issue

Real-Life Example

In recent years, companies like Reliance Industries and Bharti Airtel have used the right issue route to raise capital efficiently.
Reliance Industries’ 2020 right issue worth ₹53,000 crore was one of the largest in Indian history, offered at ₹1,257 per share against a market price of ₹1,450 — rewarding its loyal shareholders with a great investment opportunity.

JM Financial Services Perspective

At JM Financial Services, we believe understanding such corporate actions can help investors make informed decisions and capitalize on value-creation opportunities.
If you want to explore or invest in companies announcing a Right Issue, you can easily do so through your Demat account with JM Financial Services.
Our experts and research team guide you at every step of your investment journey.

Conclusion

A Right Issue of shares is a win-win situation — it helps companies raise funds while giving existing investors a chance to enhance their ownership at a discounted price.
For investors, it’s a great opportunity to increase stake in fundamentally strong companies for long-term growth.

If you’re planning to invest in equities or participate in corporate actions like right issues, consider opening a Demat account with JM Financial Services for a seamless and transparent experience.

FAQs

1. What is the purpose of a right issue?
To raise additional capital from existing shareholders without increasing debt.

2. Who is eligible for a right issue?
Only existing shareholders as of the record date announced by the company.

3. Can I sell my rights?
Yes, if it’s a renounceable right issue, you can sell your rights in the market.

4. What happens if I don’t apply for a right issue?
Your shareholding percentage may slightly reduce, but there’s no penalty for not participating.

5. Is a right issue a good investment?
It can be, especially if the company has strong fundamentals and the issue price is attractive.