Q.Explain the rights issue of shares. What are its main features?

A rights issue is built around a single protective idea: an existing shareholder should get first refusal on any fresh shares before an outsider does.

The offer must stay open for 15 to 30 days, is renounceable in favour of another person, and is usually priced below market price.

Section 62(1)(a) of the Companies Act, 2013 provides that where a company proposes to increase its subscribed share capital by issuing further shares, those shares must first be offered to the persons who, on the date of the offer, are holders of the company's equity shares, in proportion, as nearly as circumstances admit, to the paid-up capital already held by each of them. This is called a rights issue, and the underlying idea is a pre-emptive right: a fresh issue of shares to outsiders, if made without first giving existing shareholders the chance to maintain their stake, would silently dilute each existing shareholder's proportionate voice and claim in the company — a rights issue exists precisely to prevent that.

The main features of a rights issue follow directly from this purpose. First, the offer is made by a formal notice specifying the number of shares offered to that shareholder and a time — not less than fifteen days and not more than thirty days from the date of the offer — within which the shareholder must accept; if the offer is neither accepted nor expressly declined within that period, it is deemed to have been declined. Second, the right is renounceable: unless the company's Articles of Association provide otherwise, a shareholder who does not personally want to subscribe may renounce the offer, wholly or in part, in favour of another person of their choosing, who then steps into the shareholder's shoes for that offer. Third, a rights issue is typically priced below the share's prevailing market price, since that discount is itself the shareholder's practical incentive to take up the offer rather than let it lapse. Finally, a rights issue genuinely raises fresh capital for the company — unlike a bonus issue, the shareholder must actually pay for the shares allotted.

A common mistake is confusing a rights issue with a bonus issue simply because both go to existing shareholders 'in proportion to holding' — a rights issue is paid for by the shareholder and raises fresh capital, while a bonus issue is entirely free. Students also sometimes state the notice period incorrectly (e.g. 'at least 30 days'), when the rule is a minimum of 15 and a maximum of 30 days.