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Key takeaways:
A rights issue is a corporate action in which a company offers its current shareholders the option to buy additional shares at a set price, within a set window, before it opens the offer to anyone else. Shareholders can subscribe, or they can transfer the right to someone else, sometimes for cash, if the rights are transferable.
Companies use rights issues to raise money without taking on debt and without bringing in new outside investors, since the offer goes to existing holders first. Once issued, the new shares are ordinary shares, with the same voting and dividend rights as the shares already outstanding.
Companies turn to a rights issue for a handful of recurring reasons. Knowing which one is behind a specific offer changes how you should read it:
1. The board passes a resolution setting the number of shares, the price, and the ratio.
2. Shareholders approve the proposal at a shareholder meeting, usually by simple majority.
3. An offering document goes out with the subscription price, the ratio, and the subscription period.
4. Each holder subscribes, renounces, or does nothing.
5. The company issues shares to those who subscribed and credits their accounts.
6. The new shares are listed and begin trading alongside the existing ones.
Your entitlement comes straight from the ratio stated in the offer.
Multiply the shares you hold by the rights ratio. In a 2-for-7 issue, a shareholder with 700 shares is entitled to 700 × (2/7) = 200 new shares.
Holdings rarely divide evenly. A shareholder with 705 shares in that same 2-for-7 issue works out to 201.4 shares. Companies usually round down and pay cash for the leftover 0.4 or bundle up everyone's leftover fractions, sell them together, and divide the cash among those shareholders.
Five motives account for most rights issues, and knowing which one applies tells you a lot about how to read the offer.
Companies typically adopt one of four types of rights issues based on their specific financial strategies and objectives:
This is the most common type of rights issue. It allows shareholders the flexibility to either subscribe to the offered shares or sell their rights to other investors if they choose not to subscribe. This flexibility provides shareholders an opportunity to generate monetary value even if they don't participate directly.
Under a non-renounceable rights issue, shareholders must either subscribe to the new shares or forfeit their rights completely. Unlike renounceable rights issues, these rights cannot be traded or transferred to others, resulting in potential financial loss if shareholders choose not to participate.
In a standby rights issue, the company secures an underwriting agreement where a third party, usually a financial institution or an investment bank, commits to purchasing any unsubscribed shares. This guarantees the company that it will achieve its desired capital, even if some shareholders do not exercise their rights.
A traditional rights issue does not involve any underwriting. The company offers additional shares exclusively to existing shareholders at a discounted price. If the issue is undersubscribed, the company raises less capital than initially planned, which could limit its ability to achieve strategic objectives.
You'll usually notice the share price drop once a rights issue closes. It looks like the company lost value, but it hasn't, the drop is simply what happens when you average a higher old price against a lower new one.
New shares enter at a discount, so blending them into the total share count pulls the average price down. The theoretical ex-rights price (TERP) is what that blended price should work out to.
A bonus issue distributes shares to everyone in proportion, so no one's relative stake changes. A rights issue only protects the shareholders who pay to subscribe.
A rights issue is not automatically good or bad news for shareholders. What it means for you depends largely on whether you subscribe and what the company plans to do with the money it raises.
Common mistake: treating the discount as the payoff. The discount exists to give shareholders a reason to subscribe, not to hand out free value. What determines the outcome is what the proceeds fund, which the offer document has to disclose.
There isn't just one outcome here, what happens depends on the type of offer and on whether you act before the deadline.
Non-renounceable rights, no action: the rights lapse. You keep your existing shares, acquire no new ones, and absorb the full dilution. Using the numbers from the opening example: 100 shares out of 1,000,000 becomes 100 out of 1,200,000, 0.0100% becomes 0.0083%, while your share count stays exactly where it started.
Renounceable rights, sold before the deadline: you receive cash for the discount you're giving up. This doesn't preserve your ownership percentage, but it recovers part of the value instead of none of it.
Renounceable rights, held past the deadline: the rights simply expire, worthless. This is the outcome to avoid, a sellable asset lapsing for nothing. The date rights stop trading is the one to calendar, separate from the subscription deadline.
Once the offer is live, acting on it involves a few clear steps. The sequence matters, since two separate deadlines are involved.
1. Check the record date. Only shareholders of record on that date are entitled to rights in the offering.
2. Look for the entitlement in your brokerage account, typically credited shortly after the record date.
3. To subscribe, instruct your broker and pay before the subscription window closes.
4. To sell, place an order for the rights through your broker while they're still trading, before the trading window closes.
5. Confirm the new shares once the company credits your brokerage account.
A rights issue is defined by a handful of features worth remembering. New shares are priced at a discount to the market rate, which is what gives shareholders a reason to act. Your entitlement is proportional to what you already hold, a 1-for-5 issue gives a holder of 500 shares the right to buy 100 more. The offer stays open for a fixed window, and rights expire if unexercised by the stated deadline. Where the offer permits it, transferable (renounceable) rights can be sold on the exchange, giving the entitlement its own market value even for shareholders who don't want to buy more shares. Proceeds are usually earmarked for a stated purpose, such as expansion or paying down debt. And the total share count rises regardless of who participates, so anyone who doesn't subscribe ends up owning a smaller slice of the company than before.
A rights issue changes every shareholder's entitlement and ownership percentage, and those numbers shift again based on who subscribes, sells, or does nothing. Qapita's Cap table management platform calculates entitlements and ownership automatically for every shareholder, before and after the issue, from one live data source.
Book a demo to see how it handles a live rights offering.
Yes, though it's uncommon. Regulatory issues, market conditions, or a change in funding needs can lead a company to withdraw or postpone an offering, with shareholders notified through an official announcement.
Only shareholders of record as of the record date. Companies may add eligibility conditions based on where a shareholder is located, so an overseas shareholder isn't always able to subscribe.
No. Once issued, they carry the same voting and dividend rights as existing shares. The only difference is that they were offered first to existing shareholders, at a discount.
Yes. Entitlement is set by how many shares a shareholder already holds, not by investor type, so both receive a pro-rata offer on the same terms.
Usually it just holds your percentage steady, not increases it. Taking your full entitlement keeps your stake roughly where it was before. To actually grow your stake, you'd need to apply for extra shares beyond your own entitlement, where the offer allows it.
It varies by company, commonly a few weeks. The offer document states the exact dates, and the window to sell rights closes earlier than the window to subscribe.
