Rights issues

A company you own announces that it will offer new shares to existing holders at a stated price below the market - say ₹150 when the share trades near ₹200. The eye reads it instantly as a bargain: buy more of what I already own, at a discount, before outsiders can. illustrative

The harder questions sit underneath that pleasant surface. Why does the company need this cash now? What happens to your stake if you do not take part? And is ₹150 really ₹50 cheaper than ₹200, or does the market price quietly adjust the moment discounted shares are added? A rights issue is not a discount handed to loyal shareholders. It is a request for fresh cash, wrapped in the language of a discount.

This chapter exists because a rights issue combines three things that are usually read separately - price, ownership percentage, and the company's need for capital - and the price is the loudest of the three. The word "discount" does a great deal of hidden work. It draws the eye to what looks like a gift and away from the obligation attached to it: to keep your share of the company, you must now put in money you had not planned to spend.

The reason the reading has to slow down is that every part of the offer points back to the same buried fact - the company wants capital, and it is asking you for it. The discount exists to make the raise succeed, not to reward you. The proportion you are offered protects you from dilution only if you pay. And the market price does not stand still: once the enlarged share count is known, the reference price settles to a blended figure, so part of the "discount" was never a gain at all.

So the discipline of this chapter is to read the raise before the price. A pleasant-looking offer often hides the real question - who needs the money, why now, and who bears the risk if it does not work. The discount is the bait on the question; the question is why the cash is needed.

A rights issue is read through its structure, in order, before its price. Skipping to the discount is how the obligation gets missed.

The entitlement ratio. The offer comes as a proportion - a ratio such as 1:4, meaning one new share offered for every four you already hold. This fixes how many shares you may buy at the issue price, and no more.

The record date and the entitlement. A record date fixes who is eligible. Eligible holders receive a rights entitlement (RE) credited to their demat account. This is the crucial modern detail: the entitlement itself is a tradeable instrument, not just an option to pay. It has its own value and its own price on the exchange for a short window.

Your three responses. With the entitlement in hand you can do one of three things. You can subscribe - pay the issue price and receive the new shares, keeping your ownership percentage intact. You can renounce - sell the entitlement to someone else through renunciation on the market, taking cash for it while your percentage falls. Or you can let it lapse - do nothing, pay nothing, receive nothing, and watch the entitlement expire worthless while your percentage still falls. Two of these are reasonable choices. The third is almost never one.

The price that is not a discount. Because new shares are issued below the market price, the reference price adjusts downward to a blended figure - the theoretical ex-rights price, or TERP. The share does not stay at ₹200 while you buy at ₹150; it settles toward the average of old and new. That is why the discount is not free money: the gap between the issue price and TERP is roughly the value of the entitlement, and it is exactly the amount a non-participant gives up.

The obligation and the purpose. Underneath all of it is the fresh-cash obligation and the reason for it. The letter of offer states the purpose of funds. Capital that funds growth or genuinely repairs a balance sheet is a different animal from capital that only covers recurring losses and postpones a reckoning. The safe read follows the record - the entitlement in your demat, the ratio, the record date, and above all the stated use of funds in the letter of offer.

The figure is drawn as a fork, not a discount tag, because that is the real shape of the decision. The offer is not "cheap shares, yes or no." It is "add cash to keep your stake, take cash and give up some stake, or drop the entitlement and lose on both" - read against the single question underneath: what is the money for.

Take the concrete offer and walk a holder through it. The share trades near ₹200. The company announces a 1:4 rights issue at ₹150, and you hold 400 shares worth about ₹80,000. The app frames it as a chance to buy at a ₹50 discount. That framing is the input, not the answer. illustrative

First, the entitlement: 1:4 on 400 shares gives you the right to buy 100 new shares, costing 100 × ₹150 = ₹15,000. Next, the adjusted price: after the raise you would hold 500 shares that cost ₹95,000 in total, a blended reference of ₹190 - the TERP. So the ₹200 you saw is on its way to about ₹190 regardless of what you do. The "₹50 discount" is largely the market re-pricing itself for the new shares, not a gift landing in your lap. illustrative

Now read the fork. If you subscribe, you pay ₹15,000, own 500 shares near ₹190 each, and your ownership percentage is unchanged. If you renounce, you sell the 100 entitlements - worth roughly the ₹40 gap between TERP and issue price, about ₹4,000 - take that cash, and accept a smaller ownership percentage that the ₹4,000 has compensated. If you let it lapse, you pay nothing, receive nothing, are diluted just as the renouncer is, and additionally throw away the ₹4,000 the entitlement was worth. The dilution is the same as renouncing; the forfeited ₹4,000 is the pure penalty for inaction. illustrative

Read one real-feeling situation the way you would read a letter of offer rather than a headline. A leveraged company you hold announces a rights issue below the recent market price, and you have a few days to decide.

Line up what is actually on the page before reacting to the discount:

• The issue price is lower than the market - which looks like value, but only until TERP is worked and the discount is seen to adjust away.
• The company's debt is high - so the raise is not casual; the balance sheet needed capital.
• The stated use of funds is debt repayment - so this cash may be repairing the structure, or merely servicing borrowing the business could not carry on its own.
• Non-participation dilutes you - doing nothing shrinks your stake and, worse, forfeits the entitlement's value.

Read together, these say something specific: the lower price is not the point. The point is that a leveraged company is asking its owners for fresh cash, and the decision turns on whether that cash strengthens the business or postpones its problem. The repair is a habit, not a reflex: model your ownership with and without participation, read the use of funds in the letter of offer, and check whether the promoter is subscribing to their full share - money the controlling owner puts in on the same terms is a different signal from an offer they sit out.

The example is constructed to isolate one reading habit; it is not a statement about any real company, filing, or raise. illustrative

This chapter does not tell you whether to subscribe. It gives you the structure to read the offer honestly - the ratio, the adjusted price, the three responses, and the use of funds - but the decision still depends on facts it cannot supply: whether the business is worth backing with more capital, and whether the raise fixes or merely delays.

A rights issue can be necessary and still unattractive, or dilutive and still sensible. A viable company raising equity to cut crippling debt may be doing exactly the right thing, and a holder who subscribes may be well rewarded. A weak company raising cash to survive one more year may be handing its owners a bill for a problem that returns. The same mechanics sit under both, and the mechanics alone cannot separate them. More shares are not more wealth; the claim is rearranged, and only the use of the fresh cash decides whether it grows.

Most of all, this reading cannot turn a discount into a verdict. The price on the offer is the least informative fact about it. When the raise is large, the balance sheet is stressed, or the use of funds is vague, the honest move is to read the full letter of offer and, if the decision is material to you, to take qualified advice rather than the app's framing.

People get fooled when the discount is read on its own and the fresh-cash obligation is dropped. The pleasant half - "buy more, cheaper" - is loud, and the quieter halves - the money you must find, and the stake you lose if you do not - go unread. The errors cluster where the word "discount" papers over the request for cash:

• Reading the issue price as a ₹50 gift, when TERP shows most of the gap adjusts away.
• Treating "do nothing" as free, when it forfeits a tradeable entitlement on top of dilution.
• Assuming the discount proves the shares are cheap, rather than reading why the company needs the money.
• Ignoring the use of funds, so capital that plugs a hole is mistaken for capital that repairs the business.
• Overlooking whether the promoter is subscribing on the same terms.

The repair question stays the same as everywhere in this part: what would change your mind, and which document would prove it?