A rights issue is a way for a listed company to raise additional equity capital by offering new shares to its existing shareholders, usually at a discount to the current market price, in a fixed ratio.

Key points in summary:

1. Who gets the offer

- Only existing shareholders as on the record date.

- Each eligible shareholder receives “rights entitlements” (REs) in a fixed ratio, e.g., 1:4 (1 new share for every 4 shares held).

2. Pricing

- The rights issue price is usually set below the prevailing market price to encourage subscription.

- Example (illustrative): Market price ₹500, rights price ₹400, ratio 1:4.

3. Options for shareholders

- Subscribe fully: Apply for all rights shares you are entitled to.

- Apply for additional shares: Over and above entitlement, subject to availability.

- Renounce (sell) your REs: REs are typically tradeable on the exchange during a specific RE trading window.

- Ignore / let lapse: Do nothing, and your entitlement expires (this leads to dilution of your holding percentage).

4. Rights Entitlements (REs)

- Credited to your demat account as a temporary security.

- Can be traded on the stock exchange during the RE trading period.

- If you buy REs from the market, you still need to pay the issue price to convert them into shares.

5. Application process

- Through ASBA (via net banking or broker platforms) or as per the process specified in the letter of offer.

- You apply by choosing the number of rights shares (up to your entitlement plus any additional you want to request).

- On allotment, shares are credited to your demat; blocked funds get debited accordingly.

6. Impact on shareholding and price

- Equity base increases (more shares outstanding).

- If you do not participate, your percentage holding is diluted.

- Theoretical Ex-Rights Price (TERP) generally adjusts lower after the issue, considering the discounted new shares.

- Wealth impact depends on:

- Discount level,

- Your participation,

- Company’s future performance with the raised funds.

7. Why companies do a rights issue

- To raise equity for:

- Expansion, capex, acquisitions.

- Reducing debt / improving balance sheet.

- Regulatory capital requirements (e.g., banks, NBFCs – example only).

- Often preferred over a fresh public issue because it:

- Rewards existing shareholders with first right,

- Can be faster and sometimes cheaper to execute.

8. Evaluation factors (for information only)

- Purpose of funds: Productive growth vs plugging losses/debt.

- Promoter participation: High participation can be a positive signal (example-based observation, not a rule).

- Company fundamentals: Profitability, leverage, cash flows.

- Issue pricing and discount vs current market price.

- Past capital allocation track record of management.

This is a general summary for understanding purposes and is not investment advice or a recommendation to participate in any specific rights issue.

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