The simple meaning of a rights issue is the provision of rights to a company’s current shareholders that empower them to buy more shares of the business. This is typically based on the existing or previous holding of shareholders and the new shares are made available at discounted rates. The rights issue is an optional provision for the shareholders and they can very well choose to not apply for more shares.
 

In this article, we will discuss the underlying reasons behind the issuance of a right issue, elaborate on the application process in a situation where you are eligible for it, its procedural working, and whether it is right for you or not.

• Rights issues allow existing shareholders to buy discounted shares proportional to their current holdings, but participation is optional.
  

• The application process can be completed via ASBA through net banking or through RTAs, with the entitlement temporarily credited to a shareholder’s demat account.

• Due diligence is essential, as companies with financial difficulties might use rights issues to raise funds.

Businesses typically tend to go the rights issue route when they want to raise money. Besides this, such announcements can also be made when a company undergoes mergers or acquisitions. It enables a firm to dilute its share price at the cost of enhancing the shareholder base.
 

The rights issue is also a cheaper alternative to raising money when compared to other methods like an initial public offering or a follow-up public offering.

The first step in applying for a rights issue is receiving the eligibility form from the issuing business. You can complete and submit the form offline or online.
 

If you want to complete the application online, you can utilise the Applications Supported by Blocked Amount (ASBA) framework available on net banking of banks like SBI, HDFC Bank, and ICICI Bank. All you need from your end are the details of your Demat account, which would include the name and ID of your depository participant.
 

Another method to apply for a rights issue is through the RTAs (Registrar and Transfer Agents). You can visit the website of the RTA, and enter the ID of your depository participant and your client details to complete the registration. Here, you can make a payment either through the NEFT or UPI method. After you complete and submit the application, the entered amount will be reserved from your connected bank account until you are allotted the shares.

In a rights issue, existing shareholders are granted the chance to buy additional shares in proportion to their current holdings at a discounted price. For instance, if a company offers 30 new shares for every 100 shares owned, shareholders are entitled to buy these additional shares at a price lower than the market value.
 

This entitlement is credited temporarily to the shareholder's demat account as Rights Entitlement (RE), allowing them to either apply for the additional shares or sell the entitlement in the market. However, shareholders are not obligated to purchase the shares and can choose to sell their RE to other investors.
 

The appeal of a rights issue lies in the discount offered on the new shares compared to their current market price, making it an attractive option for investment.

Despite the numerous advantages of a rights issue, you should be cautiously optimistic. It is important to put in due research as it often reveals important information like the financial conditions of the business, cash flow levels, debt status, and terms, among others.
 

Without a doubt, it is tempting to go all-in when a rights issue presents itself. However, you must be cautious of desperate companies trying to raise money in any way possible. When a firm has a robust financial track record and has been consistently paying dividends, its rights issue could be a great opportunity to double down on your investment.

A rights issue provides current shareholders the right to purchase a company’s additional shares at a lower rate than the market price, which can be an attractive investment option if the company has solid financials. While the process is simple and can be done online or through RTAs, investors should conduct due diligence before participating.