What Is a Right Issue of Shares? A Complete Beginner’s Guide

Raising funds is a crucial step for any growing company. Whether it’s for expansion, clearing debt, or launching a new product, businesses often need additional capital. One common way companies raise money is through a right issue of shares. If you’re new to this concept, don’t worry — this guide will explain everything in a simple and easy-to-understand way.

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What Is a Right Issue of Shares?

A right issue of shares is a method used by a company to raise additional capital by offering new shares to its existing shareholders. Instead of inviting the public, the company gives current shareholders the first opportunity to buy additional shares in proportion to their existing holdings.

In simple terms, if you already own shares in a company, you get the “right” to purchase more shares before anyone else.

This approach helps companies raise funds while maintaining fairness among existing investors.

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Why Do Companies Choose a Right Issue?

Companies choose a right issue of shares for several reasons:

• To expand operations

• To fund new projects

• To reduce debt

• To strengthen working capital

• To avoid taking loans at high interest rates

Unlike public offerings, this method is usually quicker and less expensive. It also helps companies maintain control since shares are offered to existing shareholders rather than outsiders.

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How Does a Right Issue Work?

Here’s how the process typically works:

1. Board Approval: The company’s board of directors approves the decision.

2. Offer Announcement: The company announces how many shares are being offered and at what price.

3. Eligibility Date: A record date is set to determine which shareholders are eligible.

4. Offer Period: Shareholders can choose to accept, reject, or renounce their rights.

5. Allotment of Shares: After the offer period ends, shares are allotted to subscribers.

For example, if a company announces a 1:4 right issue, it means a shareholder can buy 1 new share for every 4 shares they already own.

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Key Features of a Right Issue of Shares

• Offered only to existing shareholders

• Usually priced lower than market value

• Can be renounced (transferred to someone else, if allowed)

• Proportionate to current shareholding

Because the shares are often offered at a discounted price, investors may find it attractive.

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Advantages of a Right Issue

1. For Companies

• Faster capital raising

• Lower cost compared to public offerings

• No need for heavy marketing

• Maintains ownership structure

2. For Shareholders

• Opportunity to increase ownership

• Discounted price benefit

• Protection from dilution (if they subscribe)

This makes the right issue of shares beneficial for both companies and investors when planned properly.

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Are There Any Risks?

Yes, there can be risks:

• If shareholders do not subscribe, ownership percentage may reduce.

• If the company is financially weak, investors may hesitate to invest more.

• Share prices may fluctuate after the announcement.

This is why it’s important to evaluate the company’s financial health before participating.

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Legal Framework in India

In India, the right issue of shares is governed by Section 62 of the Companies Act, 2013. The law ensures that companies follow proper procedures and protect shareholder interests.

Proper documentation, board resolutions, and communication with shareholders are essential parts of the process.

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Should Investors Subscribe to a Right Issue?

Before making a decision, investors should consider:

• Why the company is raising funds

• How the funds will be used

• The company’s past financial performance

• Future growth potential

This is where professional investment advisory services can be extremely helpful. Experts analyze the company’s financial position and help investors make informed decisions. Many individuals rely on investment advisory services to understand whether participating in a right issue aligns with their financial goals.

For business owners, structured Business Advisory support is equally important. A proper Business Advisory strategy ensures that the right issue is planned correctly, legally compliant, and aligned with long-term growth plans.

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Right Issue vs Public Issue

Many beginners confuse a right issue with a public issue. The key difference is:

• A public issue offers shares to the general public.

• A right issue offers shares only to existing shareholders.

Because it targets current investors, the process is generally simpler and faster.

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Real-Life Example (Simplified)

Imagine you own 100 shares of a company. The company announces a 1:5 right issue of shares at ₹50 per share, while the market price is ₹70.

This means you can buy 20 additional shares (1 for every 5 shares you own) at ₹50 each. You save ₹20 per share compared to the market price.

If you believe in the company’s future growth, this could be a good opportunity.

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How Professional Guidance Helps

Executing a right issue of shares requires careful financial planning, legal compliance, and clear communication. Companies often seek professional help to ensure smooth execution.

At Uniqey by JJ Tax, businesses receive structured Business Advisory solutions that guide them through compliance, documentation, and strategic planning. Similarly, investors can benefit from expert investment advisory services to evaluate whether subscribing to a right issue is financially wise.

Professional guidance reduces risk, ensures transparency, and supports long-term decision-making.

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Final Thoughts

A right issue of shares is a practical and efficient way for companies to raise additional capital while giving priority to existing shareholders. It helps businesses grow without losing control and gives investors a chance to increase their ownership at a discounted price.

However, like any financial decision, it should not be taken lightly. Understanding the company’s financial position and seeking professional advice can make a significant difference.

If you are a business planning to raise funds or an investor evaluating opportunities, the right support from experienced advisors can help you move forward with confidence.

For structured guidance and expert support, Uniqey by JJ Tax offers reliable one stop solutions for business  tailored to your financial and business needs.