Rights issue: meaning, how startups use it in India and examples

A rights issue gives existing shareholders the first chance to buy new shares. Each holder is offered a number of shares in proportion to what they already hold. A holder with 10% of the company is offered the right to take up to 10% of the new shares.

The word right matters. The shareholder is not forced to buy. They can subscribe, decline, or pass the right to someone else. Nobody else can buy the new shares until the existing holders have been given this chance.

The board of directors decides the amount, the price and the ratio, for example one new share for every four held. The company then sends each shareholder a written offer notice that states the number of shares offered, the price and the dates.

Shareholders respond by paying for all or part of their entitlement. Shares nobody takes up can usually be offered to others on terms the board decides, if the notice says so. The company then allots the shares and files the required forms with the Registrar of Companies.

• Board approval of size, price and ratio, and a notice to shareholders.
• Offer period open for a fixed number of days.
• Each holder subscribes fully, partly or not at all, or renounces the right.
• Unsubscribed shares are dealt with as the board decides, if the offer notice allows it.
• Allotment, registers updated and filings made with the Registrar of Companies.

Section 62(1)(a) of the Companies Act, 2013 says that when a company wants to increase its subscribed capital by new shares, those shares must first be offered to existing equity shareholders in proportion to their paid-up capital. As of November 2026, the offer must stay open for at least 7 days and at most 30 days, after the minimum was cut from 15 days by Rule 12A of the Share Capital and Debentures Rules in 2021. The notice must reach shareholders at least three days before the offer opens.

The offer notice must also state that the shareholder may renounce the shares, meaning transfer the right to another person, unless the articles say otherwise. A shareholder who does not respond within the offer period is treated as having declined.

A private company can also shorten these periods with the consent of 90% of its members. Listed companies follow SEBI's ICDR regulations as well, which set the process, the disclosures and the timeline for a listed rights issue. Foreign shareholders are also bound by FEMA, which has pricing and reporting rules for them. Rules change, so check the current text of each.

Venture rounds usually go to new investors through a private placement. A rights issue is different because it is offered to everyone who already holds shares, and it is most common when the existing investors want to keep funding the company.

The common reasons are an insider round, where existing investors and founders put in more money without a new lead; a bridge round, a short top-up that carries the company to its next big raise; and protection against dilution. A holder who takes up the full right keeps the same percentage, and a holder who does not is diluted.

For a private company, the Companies Act does not set a minimum rights price, so it is negotiated and decided by the board. In a listed company a rights price is often below the market price, because the discount rewards holders for taking part. In a private startup it is often set near the last round, or below it if the company needs money urgently and the existing investors are the only buyers.

If the price is lower than the last round, the issue works like a down round. The new shares are cheaper, so everyone who did not take part sees their percentage fall and the paper value per share drop. Holders who take their full right keep their percentage, but they put in fresh money.

The numbers that matter are the ratio, the price per share, the total raised and the percentage each holder will own after the issue.

Nothing is forced. Your shares stay yours, but your percentage falls. If you do not want to buy, you may renounce, which means transferring the right to another person, if the articles and the offer notice allow it. In a listed company, renounced rights can be traded on the exchange during a set window. In a private company, the renunciation usually goes to a friendly investor and is agreed in writing.

Anti-dilution clauses in some shareholders agreements may protect preferred investors if the issue is priced low. A shareholder in a startup should read the pro rata right and the anti-dilution term in the agreement.

Start with the shareholders agreement. It may already give investors a pro rata right, which is a right to take their share of any new issue, and it may set how unsubscribed shares are shared out. Check whether the articles allow renunciation and whether any investor holds an anti-dilution clause that a low price could trigger.

Then look at who can afford to take part. If only the lead investor can put in more money, the others are diluted even though the issue was open to all. Founders who hold shares but have little cash often cannot take up their right, so a rights issue can shift ownership toward the investors who can pay. Ask for the post-issue cap table before approving the price.

A rights issue goes to existing holders, in proportion. A preferential allotment or private placement goes to chosen persons, often new investors, in any split the company agrees. A public issue, such as an IPO or a follow-on offer, goes to the general public.

The distinction shows up in headlines. Words like raised funds via a rights issue point to existing investors backing the company again. Words like fresh round from a new fund describe a private placement. This is general information and not legal or tax advice, so a founder or investor should check specifics with a professional.