Contributed by: Seema Gupta
Email – seemagupta@simplybiz.in

1. Introduction
A Rights Issue is one of the most widely used methods through which a Listed Company raises additional equity capital from its existing shareholders. Instead of offering shares to the public or new investors, the company first offers them to its existing shareholders in proportion to their shareholding usually at a price lower than the prevailing market price. This enables shareholders to maintain their proportionate ownership while preserving their pre-emptive rights. 

 2. Legislative Framework
The legal framework for a Rights Issue is primarily governed by Section 62(1)(a) of the Companies Act, 2013, which regulates the offer process and filing of the Return of Allotment in Form PAS-3. For listed companies, compliance extends beyond the Companies Act, includes the SEBI (ICDR) Regulations, 2018, governing eligibility, disclosures, the Letter of Offer and Rights Entitlements, and the SEBI (LODR) Regulations, 2015, which prescribe disclosure and stock exchange compliance requirements throughout the Rights Issue process. 

 3. Rights Entitlements (REs): 
A. The Cornerstone of the Modern Rights Issue Framework One of the most significant developments in the Rights Issue framework has been the introduction of Rights Entitlements (REs) by SEBI. It has been introduced under the SEBI (ICDR) Regulations, 2018 to facilitate an efficient, transparent and investor-friendly Rights Issue process. 
A Rights Entitlement (RE) is a temporary electronic right credited to the demat account of eligible shareholders whose names appear in the Register of Members as on the Record Date. It represents the shareholder’s entitlement to apply for equity shares under the Rights Issue. However, an RE is not an equity share but rather a tradeable right. 
Example – The first live implementation of this mechanism was in May 2020, when Reliance Industries launched its rights issue, making its shareholders the first to receive and trade REs in this dematerialised format.

B. The Digital Revolution: From Paper to Bytes
Pre-2020: The Cumbersome World: Before 2020, the Rights Issue process was largely manual: 

• Companies dispatched physical application forms to shareholders by post. 
• Shareholders filled out forms manually and submitted them through prescribed channels. 
• Payments were via cheque, and funds were immediately debited from bank accounts. 
• The entire timeline stretched to 45-60 days, involving considerable paperwork and administrative costs. 

 Post-2020: The Digital Era: SEBI’s January 2020 reforms revolutionized the process: 

• Rights Entitlements are electronically credited to shareholders’ demat accounts on a T+1 basis after the Record Date. 
• Shareholders can apply for shares digitally through ASBA (Applications Supported by Blocked Amount) or renounce their entitlements. 
• REs are assigned a temporary R-ISIN and can be actively traded on stock exchange equity segments during the issue period. 
• Renunciation can occur on-market (via brokers on the exchange) or off-market (via depository transfer). 
• The entire process now completes in approximately 30 days. 
• Retail investor participation has soared due to ease of access. 

C. The Life Cycle of a Rights Entitlement (From Creation to Expiry)  

Rights Entitlements function is critical for shareholders to make informed decisions:
Stage 1: Record Date & Allotment
The company announces a Record Date. Only shareholders whose names appear in the register on this date are eligible to receive REs. On T+1 after the Record Date, REs are electronically credited to eligible shareholders’ demat accounts. 

Stage 2: Issue Opening – Three Choices
Once the issue opens, shareholders have three distinct options for each RE received: 

1. Subscribe: Apply for the shares using their REs and pay the subscription amount through ASBA. 
2. Renounce or Transfer: Sell their RE in favour of another person through the stock exchange or an off-market transfer; or  
3. Lapse: choose not to exercise the entitlement, in which case the RE automatically lapses upon closure of the issue.  

Stage 3: Issue Closing & Expiry
Here’s where the temporary nature of REs becomes critical, After the Issue Closing Date: 

• Any RE that was not exercised automatically extinguished and has zero value.
• Any RE acquired by a non-shareholder from an existing shareholder through a market transfer, but not exercised by applying for the Rights Shares, will result in the complete loss of the consideration paid to acquire such RE. 

 (An important feature of the present framework is that even a person who is not an existing shareholder may participate in a Rights Issue by acquiring Rights Entitlements during the trading period). 

• Only shareholders who have actually applied for and been allotted shares will have those shares credited to their demat accounts. 

Stage 4: Allotment & Listing
After the issue closes and minimum subscription is verified, the company finalizes the allotment basis. Allotted shares are credited to demat accounts, and listing and trading approval is obtained from the stock exchange. 

4. Why Does a Company Prefer a Rights Issue? 

1. Raise Capital Without Losing Control: Existing shareholders get the first right to subscribe, helping promoters maintain their ownership and voting rights. 
2. Cost-Effective Fundraising: Rights Issues involve lower expenses than an IPO or QIP due to limited marketing, lower regulatory costs, and a simplified process.  
3. Faster and Predictable Process: SEBI’s electronic Rights Entitlements (REs) and ASBA mechanism have made the process quicker, transparent, and easier to execute. 
4. Strengthens Shareholder Confidence: Offering shares to existing shareholders first demonstrates fairness and encourages long-term investor participation.

5. BENEFITS OF A RIGHTS ISSUE
To Company 

• Raises equity capital may be utilised for business expansion, repayment of borrowings, working capital requirements, acquisitions or other strategic objectives. 
• Lower fundraising costs compared to other equity-raising methods.  
• Preserves the existing shareholding pattern if shareholders fully subscribe.  
• Enables Faster fundraising through a streamlined SEBI framework.  

 Example: A listed company raises ₹500 crore through a Rights Issue to repay loans instead of borrowing at a high interest rate.

To Shareholders 

• Opportunity to buy additional shares, usually at a discount to the market price.  
• Helps maintain proportionate ownership and voting rights.  
• Rights Entitlements (REs) can be sold on the stock exchange if shareholders do not wish to subscribe.  
• ASBA ensures application money remains blocked in the bank account and is debited only upon allotment.  

Example: If the market price is ₹200 and the Rights Issue price is ₹160, an eligible shareholder can either subscribe at ₹160 or sell the REs on the stock exchange. 

6. Entities NOT eligible to make a Rights Issue
Regulation 61 of the SEBI ICDR Regulations specifies the circumstances in which a company cannot access the Rights Issue route if  

A. Issuer or its promoters, promoter group or directors: 

1. are debarred by SEBI from accessing the capital market,  
2. are associated with another debarred company,  
3. are declared as Fugitive Economic Offenders, or  

 B. The company’s equity shares are suspended from trading due to disciplinary action by the stock exchange. 
However, where the period of SEBI debarment has expired before filing the Draft Letter of Offer, the restriction does not apply.  

 7.GENERAL CONDITIONS
 Regulation 62 prescribes certain general conditions that must be fulfilled before the issue is opened. These include : 

1. obtaining in-principle approval from the stock exchange,  
2. ensuring that all existing partly paid-up shares are either fully paid-up or forfeited, and,  
3. where the issue is intended to finance a capital expenditure project, arranging at least 75% of the project cost (excluding Rights Issue proceeds and internal accruals) in advance.  
4. Restriction to the amount that may be utilised for General Corporate Purposes (GCP) and unidentified acquisitions or investments max. 25% of total issue size each and if combined the max 35% of total issue size, thereby promoting greater transparency in the utilisation of issue proceeds.  

2025 Amendment: If Promoter/Director is a wilful defaulter or fraudulent borrower, the promoter group can only renounce their rights within the promoter group or to pre-disclosed specific investors. 

8. Procedural Framework
The Rights Issue process can be broadly divided into the following four stages: 

1. Planning: Assess funding requirements, determine the issue size, appoint intermediaries (Merchant Banker, Registrar, etc.), prepare the Draft Letter of Offer (DLOF), and intimate the stock exchange about the Board Meeting.  
2. Approval: The Board approves the Rights Issue, including the issue price, entitlement ratio, and Record Date. The DLOF is filed with the stock exchange, public announcements are made, and in-principle approval is obtained.  
3. Issue: Rights Entitlements (REs) are credited to eligible shareholders’ demat accounts, the issue opens for subscription, and shareholders may either subscribe to the shares or renounce/sell their REs.  
4. Post-Issue Compliance: After issue closure, the basis of allotment is finalized, shares are allotted and listed, Form PAS-3 is filed with the ROC, and all post-issue regulatory compliances are completed.  

 Practical Example: A listed company raising funds for business expansion plans the issue, obtains Board and stock exchange approvals, opens the Rights Issue for shareholders, allots shares after closure, and files PAS-3 along with completing SEBI and stock exchange compliances. 

 Key Requirements 

• Subscription Period: Minimum 7 days and maximum 30 days; applications cannot be withdrawn after issue closure.  
• Minimum Subscription: Generally, 90% of the offer is required. The requirement is not applicable in specified cases where promoters undertake to fully subscribe to their entitlement without renunciation, except within the promoter group.  
• Refund: If the applicable minimum subscription is not received, the application money must be refunded within 4 days from the closure of the issue. 

 9. Conclusion
A Rights Issue continues to be one of the most effective and shareholder-friendly mechanisms for raising equity capital by listed companies. The introduction of electronic Rights Entitlements (REs), the ASBA mechanism, and a streamlined digital process has significantly transformed the Rights Issue framework. These reforms have reduced timelines, enhanced transparency, improved investor participation, and made the overall process more efficient for both issuers and shareholders. 
A well-planned Rights Issue not only enables companies to meet their funding requirements efficiently but also reinforces investor confidence through a transparent, fair and well-regulated capital raising process. 

If you want to know more on the Rights issue by a Listed Company: A Practical guide under Companies Act, 2013 and SEBI (ICDR) Regulations related requirements, please write to our director – Compliance & Strategy – Vaishali Vohra at the mail ID vaishali@simplybiz.in, VP – Corporate Compliances – vanaja@simplybiz