New shares, offered to the owners first
Suppose Bharat Foods needs ₹80 crore for a new plant. It could borrow, or sell new shares to outside investors through a QIP or a preferential issue (01.02.01). Or it can make a rights issue: offer new shares to its existing shareholders, in proportion to what each already holds.
The hypothetical offer is 1 new share for every 5 held, at ₹400, while the market price is ₹500. One crore shares means 20 lakh new ones, and 20 lakh × ₹400 is the ₹80 crore. Your ten shares entitle you to two.
Indian company law builds this in: new shares offered to existing holders must be offered in proportion to their holdings, and the offer carries a right to pass it on to someone else unless the company's articles say otherwise. That right to pass it on turns out to matter more than the discount.
Why the discount is not a gift
₹400 for a share trading at ₹500 looks like ₹100 of free money. But the ₹100 does not come from outside. When 20 lakh shares are sold below the market price, every existing share is worth a little less, because the company's value is now spread over more shares than the cash it received would justify.
All else equal, the price settles at the theoretical ex-rights price: the old value plus the new money, divided by the new number of shares. (₹500 crore + ₹80 crore) ÷ 1.2 crore shares is ₹483.33. The discount is paid by the shareholders, to the shareholders.
So the question is never whether the discount is generous. It is whether you are on the paying side or the receiving side of it — and that depends on what you do.
Three things you can do
The hypothetical Bharat Foods offer: 1 for 5 at ₹400. Tap each choice and follow your ten shares.
All else equal means the price moves only because of the issue itself. On a real ex-date prices move for many reasons, and entitlements trade at whatever buyers will pay, often below their theoretical value.
Dilution, measured
Your slice of Bharat Foods is 10 shares out of 1 crore — 1 in 10 lakh, the 0.0001% from 01.01.01. After the issue there are 1.2 crore shares. Take up your two and you hold 12 of 1.2 crore: still 1 in 10 lakh. Do not, and your 10 are 1 in 12 lakh. Your slice is a sixth smaller, and nothing about you changed.
That is dilution: your percentage falls because the total grew and you did not grow with it. In a rights issue you are at least offered the chance to keep pace. In a QIP or a preferential issue (01.02.01) you are not offered anything, and the dilution simply happens to you.
Watch the large holders too. Bharat Foods' promoters hold 75 lakh shares, 75% (01.03.01). If they take up all 15 lakh of theirs, and apply for shares other holders leave unclaimed, their stake can rise through a rights issue — without buying a single share on the exchange.
- Shares in issue
- 1 crore → 1.2 crore
- Price, all else equal
- ₹500 → ₹483.33
- Your ten shares are worth
- ₹5,000 → ₹4,833.33
- Your slice of the company
- 1 in 10 lakh → 1 in 12 lakh
Bharat Foods offers rights shares at ₹400 when the market price is ₹500. Which is true?
The entitlement is something you own
Your right to buy those two shares arrives as a separate item in your : a rights entitlement, credited to everyone on the register at the end of the . It has its own identifier, and during the issue it can be sold on the exchange or transferred to someone else.
That is why selling is a real choice. A buyer who pays you for your entitlements is paying for the discount you would otherwise lose. Their price is set by the market, not by the formula, and trading in entitlements closes before the issue itself does — the letter of offer gives the dates.
Entitlements that are neither used nor sold by the close simply lapse. Nothing is refunded, because nothing was ever paid for them — but the fall in your share price has already happened.
Another company offers 1 new share for every 4 held, at ₹200. Its shares trade at ₹300. Drag to the theoretical ex-rights price.
Since SEBI's 2025 changes, a listed company is expected to complete a rights issue within 23 working days of its board approving it. An entitlement can appear in your holdings, trade, and lapse inside a few weeks. If you see an unfamiliar line in your demat account after a company announces a rights issue, that is the decision waiting for you.
A rights issue brings money into the company and asks shareholders to keep up. The next corporate action runs the other way: the company sends money out, and buys its own shares back.