In India, a rights issue gives shareholders who meet the stated record-date conditions a proportional opportunity to buy additional shares. A public issue invites investors generally, including people who do not already own shares. For an existing holder, the practical questions are how many shares are offered, at what price, by when, what the proceeds will fund, and what happens if you do nothing.
The explanation below uses Indian rules and terminology. Read the particular offer document and current SEBI and exchange instructions before acting; deadlines, application routes and entitlement treatment are issue-specific.
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Scope: these definitions are India-specific
SEBI, the National Stock Exchange (NSE) and the Companies Act, 2013 use the distinctions explained here. Other countries may use different names, eligibility rules or settlement systems. Even in India, an issue’s offer document controls its exact terms, and regulations can change.
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Random freezes, missing sound and display glitches usually trace back to one bad driver. Find and replace yours safely.Free scan · under a minuteSEBI’s May 2025 FAQ describes a public issue as an offer to the public and a rights issue as an offer to shareholders on the record date in a stated ratio. A public issue can be an initial public offering (IPO) by an unlisted company or a further public offering (FPO) by a company that is already listed.
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Rights issue and public issue at a glance
| Comparison | Rights issue | Public issue |
|---|---|---|
| Who is invited | Existing shareholders who satisfy the record-date terms | Investors generally, including new investors |
| How the offer is sized | A stated entitlement ratio against eligible holdings | A public offer size and allocation process set out in the offer documents; no automatic pro-rata entitlement from current ownership |
| Main forms | A separate issue type, not an IPO or FPO | IPO for an unlisted issuer; FPO for a listed issuer making a further public offer |
| Primary document | Letter of offer and, where applicable, abridged letter and application materials | Prospectus; a red herring prospectus may be used for a book-built issue |
| If an existing holder does nothing | The holder may suffer percentage dilution when new shares are issued; the offer terms determine what happens to the entitlement | The holder receives no pro-rata subscription right merely because they already own shares |
How a rights issue works
Eligibility is fixed by the record date
The issuer announces a record date. Investors who are shareholders on the terms specified for that date receive an entitlement calculated from their holdings. Buying shares after the relevant cut-off does not create a retroactive entitlement. Check the issuer’s notice and letter of offer rather than relying on a general calendar rule.
The ratio determines the number of shares
A ratio such as 1:4 is an illustration of how an offer is expressed: one new share for every four shares held by an eligible investor, subject to the issuer’s stated treatment of fractions and other conditions. The actual ratio, issue price and maximum entitlement appear in the letter of offer. The ratio is not a recommendation to subscribe.
Participation is an option
SEBI’s investor guide identifies three broad choices: subscribe to all or part of the entitlement, renounce or sell the entitlement where the offer permits it, or take no action. Whether an entitlement can be transferred, traded, or exercised in a particular way is controlled by that issue’s documents and the applicable market process.
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Rights shares are usually offered below the prevailing market rate, according to SEBI’s guide. The discount can make the offer look attractive, but it is not proof that the shares are suitable or that a profit will follow. The market price can fall, the company can perform poorly, and subscribing requires additional capital.
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How a public issue works
IPO versus FPO
An IPO is a public offer by an unlisted issuer. An FPO is a further public offer by an issuer that is already listed. Both invite applications from the public under the terms in their prospectus or red herring prospectus. An existing shareholder of a listed company does not automatically receive a reserved, proportionate allocation in an FPO.
Fresh issue and offer for sale are different uses of a public offer
A public offer can include securities newly issued by the company and, where permitted, an offer for sale by existing holders. Newly issued shares can raise capital for the issuer; an offer for sale transfers shares from selling shareholders and does not, by itself, put those sale proceeds into the company. Read the prospectus to see which component is included and how the money will be used.
Allocation is not tied to your existing stake
Public-issue allocation follows the categories, application rules and applicable regulations described in the offer documents. Current ownership alone does not give a pro-rata right. A shareholder may apply under whatever public-offer category the prospectus allows, but eligibility does not guarantee an allotment.
Why the difference matters to an existing shareholder
Dilution if you do not participate in a rights issue
Dilution is a percentage effect, not an automatic cash loss on the day of the offer. If a company issues new shares and you do not acquire your proportionate entitlement, your shares represent a smaller fraction of the enlarged company. The market value of your holding can also move up or down independently.
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Illustrative calculation: assume you own 1,000 of 10,000 shares (10%). The company offers one new share for every four existing shares, and every other eligible holder subscribes. Your entitlement is 250 shares. If you subscribe, you own 1,250 of 12,500 shares, still 10%. If you do not subscribe and all 2,500 offered shares are issued to others, you own 1,000 of 12,500 shares, or 8%. This is a mathematical example, not a forecast; actual dilution depends on subscriptions, oversubscription and the final shares issued.
More money is required to preserve the percentage
Maintaining your percentage requires paying the issue price for the full entitlement. The decision therefore combines a capital-allocation question—whether to invest more in this company—with a rights-management question about subscribing, renouncing where allowed, or accepting dilution.
A public issue creates a different decision
In an IPO or FPO, you decide whether to submit an application under the public-offer rules. You are not choosing between preserving and surrendering a pre-existing pro-rata right. Your application can receive fewer shares than requested or none, depending on demand and the allocation process in the prospectus.
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Step-by-step checklist for a rights offer
- Confirm eligibility. Check the announced record date and the holding conditions in the issuer’s notice. Do not assume that owning the stock today is enough.
- Read the letter of offer. Locate the entitlement ratio, issue price, opening and closing dates, permitted application methods, payment terms, treatment of fractional entitlements and the stated use of proceeds.
- Verify your entitlement. Compare the issuer or depository statement with your holdings on the record date. Resolve discrepancies with the issuer, registrar, broker or depository participant before the deadline.
- Understand the choices. Decide whether to exercise all or part, renounce or transfer the entitlement if expressly permitted, or allow it to lapse. Do not assume a tradable entitlement exists merely because the issue is a rights issue.
- Assess the purpose of the fund-raising. Read the explanation of why capital is needed, the projects or liabilities it will fund, and any risk factors. A discount cannot compensate for an unattractive use of proceeds.
- Calculate the cash requirement. Multiply the number of shares you plan to take by the issue price and check whether the payment schedule requires money at more than one point.
- Use an approved route. SEBI’s guide describes online or broker-assisted application using ASBA for rights participation, but the actual issue may prescribe a particular channel. Follow the current broker, bank, depository and issuer instructions.
- Keep proof of submission. Save the application reference, payment or blocking confirmation and any acknowledgement. Check the status through the channel named in the offer materials.
- Monitor the closing date and allotment notices. An instruction sent after the stated window may not be accepted. Review the issuer’s post-issue communication for allotment, refunds or release of blocked funds.
Documents to read and what each one answers
Rights issue documents
- Letter of offer: the central source for the ratio, price, record-date eligibility, timetable, application and payment terms, renunciation provisions, use of proceeds and risks.
- Abridged letter and application materials: a condensed presentation and the forms or instructions used for submitting an application where supplied.
- Issuer and intermediary notices: operational directions from the company, registrar, exchange, broker, bank or depository. Check that they match the current offer terms.
Public-issue documents
- Prospectus: the principal disclosure document for a public issue, including the issuer’s business, financial information, risks, intended use of funds and offer terms.
- Red herring prospectus: used for a book-built public issue before final pricing and allocation details are settled; read the final documents and notices as they become available.
SEBI’s May 2025 FAQ separates these document types: prospectuses or red herring prospectuses for public issues, and letters of offer for rights issues. The document is not a formality; it is where the offer-specific facts and risk disclosures are established.
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Legal framework in India
Companies Act, 2013, section 23
Section 23 lists the routes available to a public company: a public offer through a prospectus, private placement, or a rights or bonus issue in accordance with the Act and, for listed companies or companies intending to list, the securities laws and regulations. The section supports treating a public offer and a rights issue as distinct routes. It does not mean that every public offer raises new capital for the company, because an offer for sale can transfer existing shares.
Section 62 and the proportionate first offer
The NSE’s rights-issue explainer links the proportionate first offer to existing shareholders with section 62 and discusses process changes associated with a 2020 SEBI circular. That explainer is useful background, but its operational summary is not a substitute for current exchange, intermediary and issue instructions.
SEBI ICDR timing
The accessed SEBI ICDR text states that the subscription period for a rights issue is at least 15 days and at most 30 days. Treat that as a regulatory framework subject to amendments, scope and exemptions, not as a universal deadline. The dates printed in the current letter of offer govern your action.
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- Announcement and record-date notice: the issuer states the corporate action and the date used to identify eligible holders.
- Issue-document availability: read the letter of offer and supporting disclosures before deciding.
- Opening date: applications and any permitted entitlement transfer process begin according to the notice.
- During the window: submit, modify or withdraw only as the issue rules allow; monitor payment or ASBA status.
- Closing date: the stated final time is decisive. Broker cut-offs can be earlier than the issuer’s legal closing time.
- Post-issue processing: review allotment, refunds or release of blocked funds, and subsequent listing or trading notices supplied by the issuer and exchange.
Common mistakes and how to avoid them
- Assuming a rights offer is guaranteed profit: compare the issue price with the current market price, but also evaluate business risks, dilution, volatility and the use of proceeds.
- Ignoring the record date: eligibility is tied to the stated date and conditions, not to a general belief that you are a shareholder.
- Waiting until the last day: technical failures, bank cut-offs and broker processing times can leave an otherwise valid decision unsubmitted.
- Assuming every entitlement can be sold: renunciation or trading is offer-specific. Confirm the mechanism, period and account requirements.
- Confusing an FPO with a rights issue: an FPO is a public offer by a listed issuer; it does not automatically preserve your ownership percentage.
- Looking only at the headline price: inspect whether the public offer includes an offer for sale, how much is a fresh issue, and where proceeds will go.
- Treating old process instructions as current: NSE material may summarize a 2020 circular. Recheck current SEBI text, exchange notices and the live issue documents.
- Investing beyond your risk capacity to avoid dilution: preserving a percentage is not a reason to commit money you cannot afford to lose.
A practical decision framework
When subscribing may be rational
Subscription can be consistent with your plan when you understand the company’s disclosures, accept the additional exposure, can fund the purchase without financial strain, and believe the terms and intended use of proceeds justify owning more. The decision should stand on the company’s prospects and risks, not solely on the existence of a discount.
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When renouncing may be preferable
If the offer permits renunciation and you do not want to provide more capital, transferring the entitlement may preserve some value that would otherwise lapse. Confirm the permitted method, timing and costs; an entitlement may have little or no realizable value if it is not transferred within the specified window.
When doing nothing is a conscious choice
Allowing the entitlement to lapse can be appropriate when the company’s prospects, risk level or capital needs do not fit your objectives. Make the choice knowingly: if the new shares are issued, your percentage stake can decline, and the market price may change.
For an IPO or FPO application
Start with the prospectus or red herring prospectus, not with assumptions based on an existing holding. Examine the issuer, fresh-issue versus offer-for-sale composition, valuation information and risks, then apply only through the stated process and within the published window. Current ownership does not promise an allotment.
Questions to answer before submitting any application
- What is the exact record date or public-offer eligibility rule?
- How many shares can I apply for, and what is the total cash commitment?
- What are the opening and closing dates, including any earlier intermediary cut-off?
- Is the issue price fixed, and if not, what pricing information is provided?
- Can the rights entitlement be renounced or traded, and through which channel?
- What does the issuer say the proceeds will fund?
- What risks, outstanding obligations or dilutive effects are disclosed?
- Which bank, broker, depository or online route is valid for this specific issue?
- What confirmation will show that the application and payment or ASBA instruction were accepted?
Bottom line for existing shareholders
A rights issue is a time-limited, proportionate opportunity tied to your holding on a record date. A public issue is an invitation to the investing public, structured as an IPO or FPO when applicable, with allocation governed by the public-offer documents. For either route, read the current offer document, verify the dates and application mechanics, and judge the company and use of funds rather than treating eligibility or a discount as an investment recommendation.
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