A Right Issue is a way for a company to raise additional capital by offering new shares to its existing shareholders in proportion to their current shareholding.
Shareholders get the “right” (but not the obligation) to buy more shares before the company offers them to the public.
Usually, the shares in a right issue are offered at a discounted price compared to the market price to encourage participation.
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Concept
Companies need funds for expansion, debt repayment, or working capital.
Instead of borrowing (loans) or issuing shares to outsiders, they give priority to existing shareholders.
Shareholders can either:
1. Subscribe to the rights shares (buy them).
2. Renounce their rights (sell/transfer them to someone else).
3. Ignore the offer (their ownership % may reduce due to dilution).
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Features of Right Issue
1. Offered only to existing shareholders.
2. Proportionate allotment – if you hold 10% of shares, you get the right to 10% of the new shares.
3. Lower price – generally below the prevailing market price.
4. Not mandatory – shareholders can accept or reject.
5. Preserves control – allows existing owners to maintain their percentage of ownership if they participate.
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Example
Suppose XYZ Ltd. has 10,00,000 shares in circulation, currently trading at ₹200 per share.
The company announces a Right Issue in the ratio 1:5 at ₹150 per share.
1:5 ratio → For every 5 shares held, a shareholder can buy 1 new share.
A shareholder owning 500 shares can buy 100 more shares (500 ÷ 5).
Price to pay = 100 × ₹150 = ₹15,000.
Market value of those shares = 100 × ₹200 = ₹20,000.
So, the shareholder benefits by getting shares cheaper than the market.
If the shareholder doesn’t want to buy, they can sell their rights to another investor (called renunciation of rights).
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Current Real-World Example (India, 2024-25)
Reliance Industries in past years used right issues to raise funds, giving existing investors the first chance to buy at a discount.
Recently, smaller companies in sectors like banking and infrastructure are using right issues to strengthen capital due to rising business demands.
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✅ In simple terms: A right issue is like a company telling its current shareholders – “We need money. Since you are already our partner, you get the first chance to buy more shares at a cheaper price before we ask outsiders.”
