Rights Issue
How a Rights Issue Works
The company announces the offering and sets key terms: the subscription price (always below the current market price), the ratio (e.g., 1 new share for every 5 held), and the subscription period (typically 2–4 weeks). Each shareholder receives transferable “rights” proportional to their holdings. They can exercise the rights (buy new shares), sell the rights on the open market, or let them expire.
If all shareholders participate, everyone maintains their proportional ownership. If some shareholders don’t participate, their stake gets diluted — they own a smaller percentage of a now-larger company.
Key Terms
| Term | Description |
|---|---|
| Subscription Price | The discounted price at which shareholders can buy new shares — set below market price to incentivize participation |
| Rights Ratio | How many new shares are offered per existing share (e.g., 1-for-5 means 1 new share for every 5 currently held) |
| Record Date | The date that determines which shareholders are eligible to receive rights |
| Ex-Rights Date | The first trading day when the stock trades without the rights attached — the share price typically drops |
| Subscription Period | The window during which shareholders can exercise their rights (usually 14–30 days) |
| Nil-Paid Rights | The rights themselves before any payment is made — these can be traded on the market |
Rights Issue vs. Seasoned Equity Offering (SEO)
| Feature | Rights Issue | Seasoned Equity Offering |
|---|---|---|
| Who Can Buy | Existing shareholders first | Any investor (public offering) |
| Price | Set at a discount to market price | Priced at or near market price |
| Dilution Protection | Shareholders can maintain their % by participating | All existing shareholders are diluted equally |
| Speed | Slower (subscription period required) | Faster execution |
| Common In | Europe, Asia, Australia | United States |
Why Companies Issue Rights
Rights issues are typically used to raise significant amounts of capital — often for debt reduction, funding an acquisition, or strengthening the balance sheet during financial stress. The discount incentivizes participation, and the pro-rata structure is seen as fairer to existing shareholders than a public offering that dilutes them without giving them priority.
Banks and financial institutions frequently use rights issues after periods of losses to rebuild their Tier 1 capital ratios.
Theoretical Ex-Rights Price (TERP)
TERP estimates what the share price should be after the rights issue, assuming full take-up. For example, if a company has 100 million shares at $50 and issues 20 million new shares at $40: TERP = (100M × $50 + 20M × $40) ÷ 120M = $48.33. The stock should drop from $50 to roughly $48.33 on the ex-rights date.
What Happens If You Don’t Exercise Your Rights
Your ownership percentage decreases. In the example above, if you held 1 % of the company and didn’t participate, you’d own 1 % of the old share count but only 0.83 % of the new, larger share count. However, you can sell your nil-paid rights on the market to partially offset the dilution.
Key Takeaways
- A rights issue gives existing shareholders the right to buy new shares at a discount, proportional to their holdings.
- Shareholders who participate maintain their ownership percentage; those who don’t get diluted.
- Rights can be exercised, sold on the market, or left to expire.
- TERP estimates the post-issue share price — the stock typically drops on the ex-rights date to reflect the dilution.
- A steep discount signals urgency — check why the company needs the capital before deciding whether to participate.
Frequently Asked Questions
What is a rights issue in simple terms?
It’s when a company offers existing shareholders the chance to buy more shares at a discounted price before anyone else. You get priority because you’re already an owner.
Is a rights issue good or bad for shareholders?
It depends. If the company uses the money productively (paying down debt, funding growth), it can create value. If the issue signals financial distress and the discount is steep, it can destroy value for shareholders who don’t participate due to dilution.
What happens to the share price after a rights issue?
The share price typically drops on the ex-rights date to reflect the dilution from new shares issued at below market price. The theoretical ex-rights price (TERP) gives you the expected new price.
Can I sell my rights instead of exercising them?
Yes. If the rights are “renounceable” (transferable), you can sell them on the stock exchange during the subscription period. This lets you receive some value without investing additional capital.
Why are rights issues more common outside the US?
Many countries (UK, Australia, much of Europe and Asia) have pre-emptive rights laws that require companies to offer new shares to existing shareholders first. In the US, seasoned equity offerings and private placements are more common because pre-emptive rights are less frequently mandated.