Rights Issue vs IPO: How Rights Entitlements Work for Existing Shareholders

Both routes end with a company getting fresh money and new shares landing in someone’s demat account. That is roughly where the similarity stops. When people compare a rights issue vs IPO, the real difference is who gets invited. An IPO is an unlisted company asking the whole market for money for the first time. A rights issue is a company that is already listed going back to its own shareholders first, usually at a discount, and giving each of them a tradable entitlement to buy new shares. If you own a stock long enough, you will eventually get one of these in your demat account. This guide walks through how rights entitlements work, what the 2025 timeline changes mean, and two worked examples so the maths stops being mysterious.

Educational content only. Not investment advice. The companies and prices in the worked examples below are made up for illustration and are not real market data.

Rights issue vs IPO: who gets invited

An IPO is open to anyone with a demat account and a bank account that supports ASBA (Application Supported by Blocked Amount). Retail investors bid within a price band, institutions bid in their own quotas, and the registrar works out allotment once the book closes. You have no prior relationship with the company. You’re a stranger asking for a seat.

A rights issue flips that. SEBI’s investor education material describes it as an offer of securities by a listed company to the people who are its shareholders on a record date fixed for the issue, and the decision to make one is taken by the company’s board (SEBI investor presentation on rights issues). The offer comes as a ratio, say one new share for every four held, and the price is fixed upfront by the company. There is no bidding and no price band.

That one design choice explains almost everything else. Because existing holders are offered shares in proportion to what they already own, a shareholder who takes up their full entitlement keeps the same percentage of the company after the issue. Someone who ignores it gets diluted. In an IPO, dilution isn’t your problem, since you didn’t own anything before.

The quick comparison

• Issuer: IPO, a company listing for the first time. Rights issue, a company that is already listed.
• Who can apply: IPO, any eligible investor. Rights issue, shareholders on the record date, plus anyone who buys their rights entitlements.
• Price: IPO, set through book building within a band (or fixed in a fixed-price issue). Rights issue, fixed by the company in advance.
• Allotment: IPO, oversubscribed retail portions go to a draw of lots. Rights issue, you get what your entitlements cover, and extra shares only if the issue is undersubscribed.
• Main document: IPO, DRHP then RHP or prospectus. Rights issue, a Letter of Offer.
• Something tradable before allotment: IPO, nothing. Rights issue, the rights entitlements themselves.

How rights entitlements actually work

Rights entitlements (REs) are the piece most shareholders find confusing, so let’s slow down here. On the record date, the company looks at who holds its shares. Each holder then gets REs credited to their demat account in proportion to that holding. According to SEBI’s material, REs get a separate ISIN of their own, exist only in demat form, and are credited before the issue opens. If your shares are physical, frozen or under litigation, the REs may go to a demat suspense escrow account instead.

Once the REs are in your account, you have a handful of choices. SEBI lists them plainly:

• Apply for your full entitlement.
• Apply for part of it and let the rest go.
• Apply for part and renounce (sell or transfer) the rest.
• Renounce the whole entitlement.
• Apply for your full entitlement and ask for additional shares. These are allotted only if the issue is undersubscribed.

Renouncing can happen on-market, by selling the REs through your broker on the exchange, or off-market, through a delivery instruction slip to a buyer you’ve found yourself. On-market RE trades settle T+2 on a trade-for-trade basis, so there’s no short selling. The one thing you really cannot do is ignore them. REs that are neither used to apply nor renounced by the issue closing date lapse and are extinguished.

Rights entitlements are the shareholder’s protection against dilution. Use them or sell them, but don’t just let them sit in the demat account until they quietly vanish.

There’s a subtle point SEBI’s presentation flags that trips up buyers. The price you pay for an RE on the exchange is separate from the issue price. If you buy an RE, you still have to apply in the rights issue and pay the full issue price to get the share. Buy the RE and forget to apply, and you’ve paid for something that lapses.

The 23-working-day rights issue timeline

Rights issues used to drag on. SEBI’s circular of March 11, 2025 changed that. Under the amended Regulation 85 of the ICDR Regulations, rights issues must now be completed within 23 working days from the date the board approves the issue (SEBI circular on faster rights issues). The new framework applies to rights issues approved by boards on or after April 7, 2025. The same circular says an issue must stay open for subscription for at least seven days and at most thirty.

The indicative schedule in the circular’s annexure, counting T as the board approval date, looks like this:

• T+1: issuer applies to the exchanges for in-principle approval and files the draft Letter of Offer.
• T+8: record date.
• T+9: REs credited to shareholders.
• T+14: issue opens and REs start trading.
• T+17: RE trading on the exchange closes, three working days before the issue closes.
• T+19: off-market transfers of REs close.
• T+20: issue closes.

After closing, a second table runs the post-issue steps. Counting the closing day as day zero, basis of allotment is done with the designated stock exchange on day one, credit to demat accounts and trading approval follow on day two, and the new shares start trading on day three. The circular also brings stock exchanges and depositories into validating bids and finalising allotment alongside the registrar.

Notice the practical squeeze. If you want to sell your REs on the exchange, your window runs from issue opening to three working days before close. SEBI’s older investor presentation says four working days, which was the earlier rule, so always check the dates in the specific Letter of Offer rather than going by memory.

The 2025 framework also gives issuers flexibility to allot to specific investors they name, and the timeline includes an advertisement disclosing those investors. If a rights issue you hold has such a component, that disclosure is worth reading.

Worked example 1: what your entitlement is really worth

Let’s take a fictional company, Kaveri Polymers, with 10 crore shares trading at ₹200. It announces a 1:4 rights issue at ₹150, meaning one new share for every four held.

• New shares issued: 10 crore ÷ 4 = 2.5 crore.
• Money raised: 2.5 crore × ₹150 = ₹375 crore.
• Market value before the issue: 10 crore × ₹200 = ₹2,000 crore.
• Theoretical price after the issue (often called the theoretical ex-rights price): (₹2,000 crore + ₹375 crore) ÷ 12.5 crore shares = ₹190.

The ₹50 discount to the market price is not free money. It gets spread across all shares, so the theoretical price drops from ₹200 to ₹190. Now say you own 400 shares, worth ₹80,000 before the issue. You get 100 REs. Here’s how your three main choices play out in theory:

• Subscribe in full. You pay 100 × ₹150 = ₹15,000. You now hold 500 shares at ₹190 = ₹95,000. That’s your ₹80,000 plus the ₹15,000 you put in. No gain, no loss, and your percentage stake is unchanged.
• Do nothing. Your 400 shares are now worth 400 × ₹190 = ₹76,000. You’ve lost ₹4,000 of value and your share of the company has shrunk by a fifth, because the share count went from 10 crore to 12.5 crore while your holding stayed at 400.
• Sell the REs. Each RE is theoretically worth the gap between the post-issue price and the issue price, ₹190 − ₹150 = ₹40. Sell 100 REs at ₹40 and you collect ₹4,000, which exactly covers the drop in your shares. In real markets REs often trade away from this theoretical value, so you might get a bit more or a bit less.

Flip it round to the buyer. Someone who buys an RE at ₹40 and then pays the ₹150 issue price has an effective cost of ₹190 per share, the same as the theoretical price. If REs are trading at, say, ₹30 while the theoretical value is ₹40, buyers are getting a cheaper entry and sellers are leaving money on the table. That gap is usually the most interesting number to watch during the RE trading window.

The discount in a rights issue isn’t a gift. It’s value moved from the shares you hold into the entitlements you’re handed, and you only keep it if you use them or sell them.

Worked example 2: why an IPO feels like a lottery

An oversubscribed IPO works very differently. SEBI’s ICDR rules require at least 35 per cent of a mainboard book-built issue to be reserved for retail investors, defined as applications of up to ₹2 lakh, and when demand outstrips supply, allottees are picked by draw of lots, each getting one minimum lot (BusinessLine explainer on IPO allotment).

Take a fictional IPO priced at ₹300 with a lot size of 50 shares, so one lot costs ₹15,000. The retail portion is 14 lakh shares.

• Maximum number of retail allottees: 14,00,000 ÷ 50 = 28,000.
• Suppose 3,50,000 valid retail applications come in at or above the cut-off.
• Chance of allotment for each application: 28,000 ÷ 3,50,000 = 8 per cent.

Here’s the bit that surprises people. Applying for 13 lots (650 shares, ₹1,95,000, just under the ₹2 lakh retail cap) does not raise your odds above 8 per cent. Each successful application gets one lot, whether it asked for one or thirteen. Those extra lots just keep more money blocked in your account until unblocking.

If demand is lower, so that the number of retail applicants is at or below 28,000, every applicant gets one lot first and the leftover shares are shared out in proportion to how much each person asked for beyond that first lot. Either way, nobody in the retail category is entitled to anything until the registrar runs the numbers. With a rights issue, your REs are your entitlement. With an IPO, your application is just a ticket in the draw.

IPO timing is tight too. SEBI’s August 2023 circular cut listing time from six working days after the issue closes to three, mandatory for public issues opening on or after December 1, 2023 (SEBI T+3 listing circular). Under its indicative timeline, the basis of allotment is approved by the evening of T+1, unblocking happens on T+2 and trading starts on T+3. If you want the mechanics of the bid itself, our walkthrough of the ASBA IPO application process covers it step by step.

What existing shareholders should check before acting

When a rights issue lands in your portfolio, we’d go through a short list before deciding anything.

1. Read the Letter of Offer, not just the headlines. It has the price, the ratio, the RE trading dates and what the money is for. A company raising capital to fund an expansion plan is a very different story from one plugging a hole in its balance sheet.
2. Check whether the shares are fully paid or partly paid. SEBI’s material notes that partly paid shares require only part of the price upfront, with the balance call money due within 12 months, and non-payment can lead to forfeiture. Budget for the later calls, not just the first payment.
3. Look at what the promoters plan to do. The Letter of Offer’s capital structure section discloses whether the promoter group intends to subscribe. Promoters sitting out tells you something.
4. Compare the RE market price with its theoretical value. Use the arithmetic from example 1 with the live share price. If you’re not subscribing, selling REs close to fair value is usually better than letting them lapse.
5. Mark the deadlines. Exchange trading in REs stops before the issue closes, and off-market transfers have their own cut-off. Missing them means losing the option to sell.

Rights issues get far less attention than IPOs, but for anyone who holds stocks for years they matter more. You’ll rarely be forced to deal with an IPO. A rights issue in a company you own, on the other hand, will show up in your demat account whether you were paying attention or not. For a real case, see our earlier piece on the Ola Electric rights issue record date, and for the bigger picture on primary market investing, our guide to IPO investing in India.

Key takeaways

• An IPO is an unlisted company’s first offer to the public. A rights issue is a listed company offering new shares to its existing shareholders at a fixed price and ratio.
• Rights entitlements are credited to your demat account under a separate ISIN. You can use them, sell them on the exchange or transfer them off-market. Unused REs lapse after the issue closes.
• Since April 7, 2025, rights issues approved by boards must be completed within 23 working days, with the issue open for 7 to 30 days and RE exchange trading closing three working days before issue close.
• In the fictional Kaveri example, a holder who ignores a 1:4 issue at ₹150 when the stock is at ₹200 loses ₹4,000 of value on 400 shares, which is roughly what the REs could have been sold for.
• IPO retail allotment in oversubscribed issues is a draw of lots for one lot each, so bidding for more lots doesn’t improve your odds.

Disclaimer: This article is for information and education only and is not investment advice or a recommendation to buy, sell or subscribe to any security. Rules and timelines can change, so always check the latest SEBI circulars and the issuer’s offer documents. Consult a SEBI-registered investment adviser before making investment decisions.