Rights Entitlement (RE): What Investors Should Know

A rights entitlement (RE) is a relatively new concept introduced by SEBI in 2020 to make applying for rights issue simple and paperless. REs are temporary securities issued in a demat form that grant existing shareholders the right to apply for additional shares in a rights issue. These entitlements serve as proof of eligibility and are credited to the shareholder’s demat account based on their holdings as of the record date set by the company.

Before going deeper into rights entitlements, let’s quickly understand what is a rights issue. 

Rights issue is a type of corporate action through which a listed company invites its existing shareholders to purchase additional shares in the company at a discounted price. Companies use rights issue to raise money when they need it. Shareholders can choose to subscribe, ignore or sell (known as renounce) their rights.

Let's understand a rights issue with an example. ABC company plans to raise money from its shareholders via a rights issue. Currently, its shares are trading at ₹120 each. The company announces a rights issue of 10 lac shares in a proportion of 1:4, allowing shareholders to buy new shares at ₹90 each, which is a 25% discount. So, for every 4 shares you own, you can buy 1 new share. This means, if you have 100 shares of ABC Ltd, you can buy 25 more shares at ₹90 each. This discount encourages shareholders to buy the new shares. And the right to buy these shares at a lower price has its own value.

As an investor, it's important to assess the purpose behind the rights issue and decide whether participating aligns with your investment goals or not.  

At this point, you must be wondering, what is the difference between rights issue and rights entitlement?  

As you already know, a rights issue is when a company offers new shares to its existing shareholders typically at a discounted price. Rights Entitlement (RE) is similar, but it specifically refers to the credit of these eligible shares in the shareholders' demat accounts. The number of REs you get depends on how many shares you already own.

Now that you know what’s a rights issue, let’s dive into the history of rights entitlements. 

Before 2020, rights entitlement (RE) was not traded on stock exchanges. Instead, investors received physical rights application forms, either sent to them directly or available for download from the registrar’s website. These forms were used to apply for rights shares through the investor’s bank.  

Alternatively, if an investor chooses not to apply, they could try to sell the physical form to someone interested - yes, people actually sold these paper applications. Recognizing that this process could be inconvenient, especially for small investors, SEBI introduced a dematerialized system for trading rights entitlements, giving investors more flexibility and ease in deciding whether to apply for the rights shares.

In January 2020, SEBI released a circular introducing the concept of rights entitlements (REs) as tradable instruments in demat form. This new facility allowed shareholders to buy and sell REs on the stock exchange. The first implementation of this mechanism took place in May 2020, when Reliance Industries launched its rights issue, making its shareholders the first to receive and trade REs in this dematerialized format.

The rights entitlement can be used to subscribe to the rights shares or traded in the market during a limited window, after which they expire and become worthless if unused. The number of REs shareholders receive is proportional to the shares they already own. 

Rights Issue Process:

• Announcement: The company announces the details of the rights issue, including new shares, price, and ratio.
• Record Date: This date determines which shareholders are eligible to receive rights.
• Issuance of Rights Entitlements: Eligible shareholders get the right to buy new shares.
• Trading Period: These rights can be traded on the stock exchange.
• Exercise Period: Shareholders use their rights to buy new shares.
• Allotment of Shares: New shares are given to those who exercised their rights.

• Adjustment in Share Price: The market price adjusts after the issue.

   

Step-by-step process of issue of Rights Entitlements:  

• Declaration: Company announces the rights issue.  
• Issue: Rights are credited to shareholders in their demat account as RE
• Listing: REs begin trading on the exchange in the equity market
• Trading Discontinued: On the cutoff date, trading of RE stops
• Expire: REs that are neither subscribed nor renounced are suspended and become worthless after expiry 

To become eligible for rights entitlement, you must be a shareholder of the company as of the record date announced in the rights issue offer. This means you need to purchase the stock before the ex-rights date, which is typically one or two working days prior to the record date, to ensure the shares are credited to your demat account on time.  

For example, company XYZ Ltd announces a rights issue, and here are its details:

Rights issue price: ₹100

Ratio: 1:2

Record date: 20 May 2025

So, if the record date is May 20th, to be eligible for rights issue, you should buy the shares by May 19. If you meet this condition, REs will be credited to your demat account based on the announced entitlement ratio. In this case, 1:2, which means you will get 1 share of every 2 shares you hold of XYZ Ltd.

You can find the list of all the ongoing rights issue on our Bulletin.  

You got Res, what next?

When you get REs, you have three options:

Use your REs to buy shares at a discount: You can apply for the rights shares using your REs at a price lower than the current market value. This allows you to increase your holding in the company at a discounted rate. To apply for rights issue, you will have to make an application to the company and pay requisite application money. Refer to the RTA or the company’s website for the rights issue application process.

Sell your REs to someone else who may want to buy the discounted shares: If you don’t wish to apply, you can sell your REs on the stock exchange during the trading window. This way, you earn some value instead of letting the entitlement go unused.

Do nothing: If you take no action, your REs will simply expire after the trading and application period ends. You won’t get any shares or money, and the REs will become worthless after the deadline passes. 

Suppose you become eligible for 10 REs but want more; you can buy additional REs from the stock exchange during the RE trading window, just like regular stocks. In fact, even if you are not a shareholder of the company, you can buy REs through on-market or off-market renunciation.  

To buy the REs through market, you can place a RE buy order of your chosen security on the ArihantPlus app. When you get the RE in your demat account, use them to apply for extra rights shares before the issue closes.

Want to know about ongoing REs? Click here

The application period begins alongside the RE trading window and remains open for at least four additional days after REs are no longer available for trading. If you don’t use your REs to apply for rights shares before the window closes, they will expire and become completely worthless. No shares / other securities for such lapsed REs will be credited.

You can submit your application for rights shares at any point during the issue period through the registrar’s website, either by making a direct payment or using the ASBA facility via net banking, provided your bank offers ASBA support to block the required funds.

You can find the application process details on the website of the company’s registrar. Additionally, the company or registrar will email this information to the address linked to your demat account, ensuring you're informed about how to apply for the rights shares.

REs is available for trading on the stock exchange from the opening day of the rights issue and remain tradeable for approximately one week, after which they are permanently delisted and can no longer be bought or sold.

When trading REs, it’s important to consider their intrinsic value. The market price of an RE can often differ significantly either higher or lower from its actual value, which is calculated as rights adjusted share price - price payable for the rights shares.

Intraday trading of REs is not allowed since they are settled on a trade-to-trade basis. For example, if you buy an RE on Monday, it will be settled on a T+1 basis.  

By purchasing REs directly from the market, you acquire the right to apply for the rights shares in the ongoing issue. However, to make use of these REs, you must submit an application for the rights shares else, the REs will expire and hold no value. 

Rights Entitlement (RE) are temporary demat securities that allow existing shareholders to apply for additional shares during a rights issue. Credited based on shareholding as of the record date, REs is allotted in a fixed ratio. Shareholders can either use them to subscribe to rights shares or trade them on the market within a limited period before they expire. Investors should evaluate its purpose carefully, as it may not always signal positive developments for the company. 

Q.  How are REs issued?

Rights Entitlements are issued in dematerialised form to eligible shareholders on the record date. The company creates a separate ISIN for REs, which are credited to shareholders' demat accounts in proportion to their existing shareholding.

Q. Will I be eligible for the rights issue if I purchased the shares on the ex-date/record date?

No, the shares must be purchased one day prior to the ex-date/record date for you to be eligible for the rights issue.

Q. Will I be eligible for the rights issue if I sell shares on the ex-record date or the record date?  

Yes, you'll still be eligible for the REs even if you sold the shares on the ex-date or the record date. Since the shares will be debited from your account the next day, you'll still be the owner on the record date, as with the onset of T+1 settlement cycle started, the ex-date and record date are the same.

Q. Can I apply for only part of the rights issue I am eligible for?

Yes. As an eligible shareholder, you can apply for the rights issue to the full extend of your RE or just apply a part of your REs. As for the remaining quality that you don't want – you can choose to renounce it or let it lapse.

Q. Can I sell my REs if I don't want to apply for rights issue?

If you don't want to apply for the rights, you can sell the REs once they're in your account, just like you sell your shares.

Q. What is renunciation in rights entitlement?

Renunciation in rights entitlements refers to the act of transferring the rights to someone else. If a shareholder doesn’t wish to subscribe to the rights issue, they can renounce their REs by selling them on the stock exchange or off-market. This allows others to buy and use those rights to subscribe.

Q. What happens to rights entitlements which are neither subscribed nor renounced?

Rights entitlements that are neither subscribed nor renounced by the shareholder lapse after the issue closes, resulting in a loss of the opportunity to subscribe to additional shares at a discount.

Q. Can an application in the rights issue be made using third party bank account?

No, applications in a rights issue cannot be made using a third-party bank account. The application must be made from the bank account of the investor applying for the shares.

Q. What is the settlement process of REs?

All clearing members are eligible for clearing and settlement of the rights entitlement. Here’s how it works:

• Settlement time: Trades are settled the next day (T+1)
• Trade settlement: Trades are settled individually (gross basis).
• Funds settlement: Funds are settled together (net basis).