Rights Entitlement
A Rights Entitlement (RE) is a tradeable instrument issued by a company to its eligible shareholders prior to a rights issue, representing their right — but not obligation — to subscribe to new shares at the issue price; since 2020, SEBI has made REs mandatorily listed and tradeable on the stock exchange, enabling shareholders who do not wish to subscribe to sell their entitlements.
Prior to the SEBI circular of March 2020, shareholders who did not wish to participate in a rights issue simply had their entitlements lapse — the rights were non-tradeable and the capital embedded in the right was effectively forfeited. SEBI's mandate to list rights entitlements changed this fundamentally. Now, when a company announces a rights issue, eligible shareholders (those holding the stock on the record date) receive REs credited to their demat accounts. These REs can be sold on the stock exchange during the RE trading window, which typically opens a few days after the record date and closes a few days before the rights issue closes.
The ex-rights date is the trading date on which shares go ex-rights — any buyer of shares on or after the ex-rights date does not receive the rights entitlement. This date is analogous to the ex-dividend date in dividend distributions. The theoretical ex-rights price of the stock adjusts to reflect the dilution from the rights issue, computed using the TERP (Theoretical Ex-Rights Price) formula: TERP = [(Current Price × Number of Existing Shares) + (Issue Price × Number of New Shares)] ÷ Total Shares Post-Issue.
The RE itself derives its value from the gap between the current market price and the rights issue price. If a stock trades at ₹500 and the rights price is ₹350, the theoretical RE value is ₹500 – ₹350 = ₹150 (minus any dilution adjustment). Market forces then determine the actual RE trading price, which may differ from the theoretical value based on demand, liquidity, and expectations about the company's post-issue performance.
For foreign shareholders, NRIs, and foreign portfolio investors, participating in Indian rights issues involves regulatory approvals from the Reserve Bank of India (under FEMA) and SEBI, which can be complex. The tradeable RE mechanism provides such investors a secondary exit without needing to navigate subscription logistics — they can sell the RE on exchange and effectively monetise the value of their entitlement.
From a corporate finance perspective, the tradeable RE regime improves capital-raising efficiency and shareholder fairness. Retail investors with small holdings, who previously could not subscribe to large rights issues due to minimum funding requirements, can now sell their REs on the exchange and at least partially recover the value of the dilution they would otherwise absorb passively.