What is Rights Entitlement? Meaning, Process & How It Works

A rights issue allows companies to raise capital by offering additional shares to existing shareholders. Shareholders receive a Rights Entitlement (RE), which gives them the option to apply for shares at a discounted price. REs are also tradeable on exchanges for a limited time. This article explains what rights entitlements are, how they work, and the process for investors in India.

Rights Entitlement is the temporary security issued by a company to its existing shareholders during a rights issue. It represents the eligibility to apply for new shares in proportion to one’s current shareholding.

For example:
If a company announces a rights issue in the ratio of 1:5, it means for every 5 shares held, the shareholder is entitled to apply for 1 additional share.

The entitlement is credited to shareholders' demat accounts in the form of REs, which are tradeable on stock exchanges like NSE and BSE.

Rights Entitlements come with specific characteristics that investors should understand before taking action:

The rights entitlement process involves a series of steps from announcement to share allotment. Understanding what is IPO allotment helps investors relate this process to how shares are assigned in public issues., as outlined below:

Step 1: Rights Issue Announcement

The company declares a rights issue and sets a record date. Shareholders holding the stock on this date receive rights entitlements.

Step 2: Credit of REs

Eligible shareholders get the RE credited to their demat accounts in a separate ISIN. This is reflected under the name of the issuing company followed by ‘RE’.

Step 3: Choosing an Action

Shareholders can:

• Use the RE to apply for rights shares
  

• Sell the RE on the exchange before the trading window closes
  

• Do nothing, in which case the RE lapses after the closing date
  

Step 4: Application Process

If opting to apply, the shareholder must:

• Log in to the trading account or RTA portal (like KFinTech or Link Intime)
  

• Use the RE number and personal details to apply
  

• Pay the amount as per rights issue price
  

• Submit the application before the last date
  

Step 5: Allotment and Credit of Shares

Post application, rights shares are allotted and credited to the demat account. Once credited, these shares become eligible for trading on the exchanges, similar to how shares are made available after an IPO listing. If the application is rejected or not fully allotted, the refund is processed.

REs are listed and trade like stocks for a limited window. To sell or buy REs:

• Log in to your trading platform
  

• Search for the RE using its symbol (e.g., “XYZ-RE”)
  

• Place buy or sell orders like regular equity trades
  

• REs trade at a price based on the demand-supply and intrinsic value
  

Rights Entitlements offer several advantages to existing shareholders, such as:

Discounted Price

Rights shares are generally offered at a discount to the market price, offering potential gains.

Retention of Ownership

Helps existing shareholders maintain or increase their stake in the company.

Liquidity Option

If shareholders don’t wish to invest more, they can sell REs in the market and monetise their entitlement.

Consider the following risks and limitations:

Time Sensitivity

REs expire quickly. Missing the application deadline results in loss of both the entitlement and opportunity.

Market Fluctuations

RE prices can be volatile and may not always reflect the discount offered.

No Refund for Non-Use

If you buy REs from the market and do not apply for rights shares, the RE becomes worthless after expiry.

Here’s how a typical rights issue works:

Example: XYZ Ltd Rights Issue

• Record Date: 1 Aug
  

• Issue: 1 Rights Share for every 3 held
  

• Rights Issue Price: ₹150
  

• Market Price: ₹200
  

• RE Trading Period: 2 Aug – 10 Aug
  

• Application Window: 2 Aug – 12 Aug
  

In this case, shareholders holding shares on 1 Aug get REs, which can be sold or used to apply for discounted shares at ₹150.

Rights entitlement provides an opportunity for existing shareholders to acquire additional shares at a discount. With the flexibility to apply or trade these entitlements, you could stay alert to dates, pricing, and procedures to benefit from such corporate actions. Understanding how REs work helps make timely and informed decisions that align with your portfolio strategy.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.