Rights are quite popular among companies for raising fresh funds for the business from existing shareholders. Such rights are typically priced at a discount so that the offer becomes attractive to the existing shareholders. You would have come across news items like “Company A is issuing rights in the ratio of 3:4 or Company B is issuing rights in the ratio of 2:5”. What do these statements mean? This ratio is referred to as the rights ratio. So a 3:4 rights issue will mean that for every 4 shares held by you, you will get 3 new shares and hence your shareholding will go up to 7 shares. A ratio of 2:5 means that you will get 2 shares for every 5 shares held. That means y our 5 shares will now become 7 shares.

In our above illustration of XYZ Ltd. what happens if the company comes out with a rights issue in the ratio of 1:2. That means for every 2 shares, the investor will get 1 additional share. That means for 1000 shares held by him, he will get an additional 500 shares and now his shareholding will go up to 1500 shares. Normally, these rights issues are priced at a discount to the market price as rights lead to dilution of equity. But how do you decide which shareholders get the rights shares?