what is a rights entitlement

A rights entitlement, or RE, is the tradable right an existing shareholder receives to buy new shares in a rights issue, usually at a discount to the market price and in a fixed ratio to what they already hold. The REs are credited to your demat account and can be exercised, sold on the exchange to someone else, or left to lapse. They exist for a limited application window and have no value after it closes.

shares offered first to existing shareholders is called

A rights issue. It is a way for a listed company to raise capital by offering new shares to its current shareholders before anyone else, in proportion to their holdings, typically at a discounted price. Because it goes to existing owners first, it lets them maintain their percentage stake — but only if they act on the offer.

what happens if i dont apply for a rights issue

If you neither apply nor sell your rights entitlement, it lapses worthless when the issue closes, and your stake is diluted because new shares were issued to others at a discount while your holding stayed the same. In short, doing nothing has a cost. If you do not want to put in more money, selling the RE on the exchange at least recovers some value instead of letting it expire.

can i sell my rights entitlement

Yes. Rights entitlements are traded on the stock exchange during the rights issue period, so a shareholder who does not want to subscribe can sell the RE to another investor who does. The buyer then applies for the new shares using the entitlement they purchased. This is why ignoring a rights issue means forgoing value rather than merely declining an offer.

why does the share price fall after a rights issue

Because new shares are issued at a discount, the market re-bases the price to an ex-rights level that averages the old price with the cheaper new shares. The fall is arithmetic, not a loss of value in itself — a shareholder who takes up the rights ends up with more shares at a lower average price. A shareholder who does nothing simply owns the same shares at the lower price, which is where the dilution shows up.

Rights entitlements: the right you can lose by ignoring

A rights issue is one of the few corporate actions that penalises inattention. The company offers you new shares, usually cheap, in proportion to what you hold. If you take them up, or sell the right to someone who will, you are fine. If you ignore the email and let the window close, you are quietly worse off — and a surprising number of investors do exactly that.

Think of it like this

Members-only pre-sale

Your club offers members a discounted pre-sale before tickets go public. You can buy at the members’ price, or sell your pre-sale code to a friend who wants in. Ignore the email entirely and the pre-sale ends — the discount is gone, and everyone who used it got in cheaper than you can now.

In the market

The rights entitlement is that pre-sale code. Use it, sell it, or lose it. Letting it lapse is the only option that leaves value on the table.

What lands in your demat, and your three choices

When a company announces a rights issue, eligible shareholders get rights entitlements credited to their demat accounts, in the announced ratio — say, one new share for every five held, at a set price below market. Those REs are themselves tradable securities for the duration of the issue, which gives you three genuine options rather than a simple yes or no.

Three things you can do with an RE

Act, and keep value

Subscribe — pay the rights price and receive the new shares
Renounce — sell the RE on the exchange to another investor
Partly subscribe, partly sell — a mix of both

Do nothing, and lose it

The RE lapses worthless at the close of the issue
New shares were still issued to others at a discount
Your percentage stake is diluted for no compensation

Why the price drops, and why that is not the loss

Worked example

The ex-rights price is arithmetic

A 1-for-5 rights issue at a discount

You holdWorth ₹1,00,000500 shares at ₹200

Rights ratioEntitled to 100 new shares1 for 5

Rights priceA discount to the ₹200 market price₹120

You pay100 new shares at ₹120₹12,000

After: 600 shares for ₹1,12,000The blended, ex-rights average≈ ₹186.67 each

The screen price falls towards that ex-rights level because the new cheap shares are averaged in. A shareholder who subscribed holds more shares at a lower average and is unharmed. A shareholder who ignored the issue holds the same 500 shares, now marked near ₹186.67 — the drop with none of the offsetting new shares. That gap is the dilution.

Check yourself

You hold shares and receive rights entitlements you do not want to subscribe to. What is the least-bad action?

What to remember

A rights issue offers new shares to existing holders, usually discounted, in a fixed ratio.
The rights entitlement is credited to your demat and is itself tradable during the issue.
You can subscribe, renounce (sell) the RE, or do a mix — only doing nothing loses value.
The price falls to an ex-rights average; subscribers are unharmed, non-participants are diluted.
Discounted does not mean good — judge the company, and renounce rather than let it lapse.

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Common questions

Short, direct answers to what people ask about this topic.

what is a rights entitlement: A rights entitlement, or RE, is the tradable right an existing shareholder receives to buy new shares in a rights issue, usually at a discount to the market price and in a fixed ratio to what they already hold. The REs are credited to your demat account and can be exercised, sold on the exchange to someone else, or left to lapse. They exist for a limited application window and have no value after it closes.
shares offered first to existing shareholders is called: A rights issue. It is a way for a listed company to raise capital by offering new shares to its current shareholders before anyone else, in proportion to their holdings, typically at a discounted price. Because it goes to existing owners first, it lets them maintain their percentage stake — but only if they act on the offer.
what happens if i dont apply for a rights issue: If you neither apply nor sell your rights entitlement, it lapses worthless when the issue closes, and your stake is diluted because new shares were issued to others at a discount while your holding stayed the same. In short, doing nothing has a cost. If you do not want to put in more money, selling the RE on the exchange at least recovers some value instead of letting it expire.
can i sell my rights entitlement: Yes. Rights entitlements are traded on the stock exchange during the rights issue period, so a shareholder who does not want to subscribe can sell the RE to another investor who does. The buyer then applies for the new shares using the entitlement they purchased. This is why ignoring a rights issue means forgoing value rather than merely declining an offer.
why does the share price fall after a rights issue: Because new shares are issued at a discount, the market re-bases the price to an ex-rights level that averages the old price with the cheaper new shares. The fall is arithmetic, not a loss of value in itself — a shareholder who takes up the rights ends up with more shares at a lower average price. A shareholder who does nothing simply owns the same shares at the lower price, which is where the dilution shows up.