What are right shares (rights issue)?

A rights issue (and the right shares it creates) is a way for a company to raise fresh capital from its existing shareholders. Rather than selling new shares to the public or to outside investors, the company offers them first to current shareholders — usually at a discount to the market price — in proportion to how many shares they already hold.

On the PSX, a rights issue is expressed as a ratio and a subscription price. A "30% right issue at Rs 10" means a shareholder may buy 3 new shares for every 10 held, paying Rs 10 (often the face value) for each new share. Unlike a bonus issue, right shares are not free — you must pay the subscription price to take them up.

Shareholders typically have three choices:

- Subscribe: pay for your entitlement and receive the new shares, maintaining your proportional ownership. - Let it lapse: do nothing and forgo the new shares. Your stake then gets diluted — your existing shares represent a smaller slice of a now-larger company. - Sell or renounce the rights where the market mechanism allows, so someone else can subscribe in your place.

Why do companies raise money this way? Common reasons include funding expansion, reducing debt, financing a major project, or shoring up the balance sheet. A rights issue from a strong company investing in growth can be positive. However, frequent or large rights issues can signal that a company is hungry for cash — perhaps because it is not generating enough internally — so the reason behind the issue matters greatly.

A rights issue affects the share price through dilution and the discount. Because new shares are sold below the market price, the stock's value spreads across more shares, and the price tends to settle at a theoretical ex-rights price between the old price and the subscription price. Shareholders who subscribe are effectively averaging down their cost; those who do not are diluted.

Eligibility is fixed by a book closure date, and as with other corporate actions you must hold the shares in time (allowing for T+2 settlement) to receive the rights.

For investors, a rights issue is a decision, not a passive event: you must weigh the company's reason for raising capital and decide whether to commit more money, accept dilution, or exit. Ignoring a rights notice can quietly erode your stake.