Rights Issue
Also known as: Subscription right, Nil-paid rights, Bezugsrecht
A short-dated option handed to every shareholder for free — and the one corporate action where doing nothing is the only guaranteed way to lose money.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat is it, really?
When a listed company needs new equity, one route is to offer it to existing shareholders first, at a discount, in proportion to what they already own. That entitlement is a right, and it has real value.
A typical structure: 1 new share for every 4 held, at €8 when the shares trade at €12. Every shareholder gets rights they can use in one of three ways:
- Subscribe — pay €8 per new share, keep the same percentage of the company.
- Sell the rights — they trade on-exchange during the offer period; take the cash, accept dilution.
- Do nothing — and this is the trap. Unexercised rights usually expire worthless, which means giving away something with a real market price for nothing.
The share price falls when the rights start trading, and this alarms people who should not be alarmed: the fall is arithmetic, not bad news. Value moved out of the share and into the right, and shareholders hold both.
a paymentsomething deliveredonly if a condition is metnot a payment
Doing nothing is the one choice that is guaranteed to cost you something.
When the issue is announced
- The company → You Rights are allotted to existing holders in proportion to their holding. They are worth something because the subscription price is set below the market price.
If you take it up
- You → The company You pay the discounted price for the new shares.
- The company → You Your percentage of the company is unchanged: you funded your share of the raise.
If you would rather not
- You → The market In most markets the rights trade separately. Selling them compensates you in cash for the dilution you are accepting.
If you do nothing
- You → The company The new shares are issued to somebody else at a discount, and the value that the right represented is simply gone.
- Asset class
- Cash equities (corporate action)
- Instrument type
- Transferable subscription right
- Traded
- Exchange-listed during the offer period
- Typical users
- Existing shareholders, arbitrage desks, underwriters
Which risks decide the outcome
Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.
- Marketdecides it
- Creditbarely applies
- Liquiditymatters
- Fundingmatters
- Operationaldecides it
What decides it here. The operational risk is the one that catches people: doing nothing is the only choice guaranteed to cost you something, and it has a deadline.
3 · IntermediateHow it works in practice
The arithmetic: TERP
The theoretical ex-rights price is the weighted average of old and new shares:
What the symbols mean
- Nthe normal distribution, or a count
- Pa price, or a present value
With 1-for-4 at €8 against a €12 price: TERP = (4 × 12 + 1 × 8) / 5 = €11.20. Each right is worth (11.20 − 8) / 4 = €0.80. A holder of 400 shares sees the price drop €0.80 and holds 400 rights worth €0.80 each — exactly neutral.
Why companies choose this route
| Method | Existing holders | Speed |
|---|---|---|
| Rights issue | Protected — pre-emption preserved | Slow (weeks) |
| Placing | Diluted without compensation | Fast (hours) |
| Open offer | Protected but non-tradeable | Medium |
Pre-emption rights are a legal entitlement in much of Europe and a matter of custom elsewhere — one reason rights issues dominate European recapitalisations while US companies more often place shares directly.
4 · AdvancedPricing & valuation
The right as an option, priced properly
A nil-paid right is a call on the share, struck at the subscription price, expiring at the end of the offer period. It trades above intrinsic value by a time premium the Black–Scholes pricer will quantify — small, because the period is two to three weeks, but real, and larger the more volatile and the closer to the strike:
What the symbols mean
- Va value
- nhow many periods, or how many things
- Cthe price of a call option
- Sthe price of the underlying today
- Kthe strike: the price written into the contract
- Pa price, or a present value
- Rights are leveraged: at €0.80 against an €11.20 share, a 5% share move is a 70% move in the right. This makes them a favourite of short-term traders and a genuine hazard for holders who buy them without understanding the gearing.
- Rights arbitrage is a standard desk trade — buy nil-paid rights, short the shares against the delta, exercise at expiry. It is one of the mechanisms that keeps rights priced close to theoretical value.
The underwriting layer
Most rights issues are underwritten: banks guarantee the proceeds and take the unsubscribed shares. This produces a specific dynamic worth understanding:
- Fees run to 2–4% of gross proceeds — expensive, and a live subject of governance criticism.
- A deeper discount makes the issue more certain to be taken up and the underwriting less risky. Underwriters therefore push for discounts, and the discount is not primarily a valuation signal.
- Rump shares — those not taken up — are placed in the market afterwards, and the proceeds above the subscription price are usually returned to the non-participating holders in developed markets. This partially rescues shareholders who ignored the whole thing, which is a mitigation and not a plan.
What a rights issue actually tells you
The information content is in the use of proceeds, not the discount. Equity raised to fund an identified investment is a different event from equity raised to repair a balance sheet, and the market prices them very differently. A deeply discounted rescue rights issue from a leveraged company is one of the clearest signals available that lenders have stopped extending credit — the pattern behind the 2008 bank recapitalisations.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow practitioners think about it
Now say it back
Close the page and give Rights Issue in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — two parties wanted opposite things badly enough to write it down.
- What the contract obliges, and when — not the payoff; the obligation.
- Where the money comes from — name the source, or you have described a hope.
- What makes it lose — the ordinary way, not the dramatic one.
Put Rights Issue beside any other instrument →
Where this instrument shows up elsewhere
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