So, you’ve been investing in stocks for a while, and you’ve come across the term “rights issue.” It sounds complicated right? Don’t worry we’re about to break it down in a way that makes sense.

So, what is a rights issue and why should you care as an investor?

Let’s get started.

What Is a Rights Issue?

A rights issue is when a company gives its existing shareholders the option to buy more shares—before anyone else can. And here’s the catch: these shares are usually cheaper than what the market is offering.

Sounds like a good deal right?

But there’s more to it than just getting cheap shares.

How Does a Rights Issue Work?

When a company launches a rights issue, it offers shareholders new shares in a specific ratio based on what they already own.

Here’s an example:

If you own 1,000 shares and the rights issue is “1 for 2,” that means you can buy 500 more shares (one new share for every two you already have).

But what if you don’t take up this offer?

Well your share in the company will shrink—a process called dilution. You’ll still own the same number of shares but they’ll represent a smaller piece of the company.

What Is a Provisional Allotment Letter (PAL)?

When a rights issue is announced the company will send out a Provisional Allotment Letter (PAL) to all eligible shareholders. This letter will tell you:

  • How many new shares you can buy

  • The price of each share

  • The deadline to act

You’ve got options once you get your PAL.

What Can Shareholders Do with Their Rights?

You can choose one—or a mix—of the following:

  1. Buy all or some of the shares offered to you.

  2. Sell your rights (this is called “nil-paid rights”) to someone else on the market.

  3. Transfer your rights to someone else’s name.

  4. Do nothing and let the rights expire.

Here’s the good news: even if you let your rights lapse or sell them you might still get a small premium if market demand is high.

What Are Ex-Rights Shares?

Ex-rights shares are shares that no longer have the right to buy new shares. This happens when:

  • The rights have been sold

  • The deadline has passed

  • The shareholder has exercised their rights

Once shares go ex-rights new buyers won’t be able to join the rights issue—so if you want in, time is of the essence.

Should You Participate in a Rights Issue?

Not all rights issues are created equal. Some are golden opportunities, others, not so much.

Here are a few questions to ask before making your decision:

1. Who Are the Major Shareholders?

Find out who owns the biggest stakes in the company. Are they:

  • Institutional investors?

  • Government entities?

  • Foreign or local investors?

Also, ask yourself: Can these investors afford to buy more shares? Are they in it for the long haul, or just looking for a quick flip?

2. Is the Offer Price Really a Discount?

A good rights issue should offer a significant discount—ideally more than 20% lower than the average share price over the past 6 months.

No real discount? It might be better to buy shares after the rights issue, when the market stabilizes.

3. What’s the Rights Ratio?

The ratio tells you how many new shares are being offered per existing share. For example:

  • A 1:5 ratio = 1 new share for every 5 owned (less dilution)

  • A 3:5 ratio = 3 new shares for every 5 owned (more dilution)

Too high a ratio can mean your current stake will shrink in value—even if you don’t buy more shares.

4. Why Is the Company Raising Money?

This is the big one.

Is the company using the money to:

  • Pay off debt?

  • Invest in growth or new projects?

  • Cover day-to-day operations?

Also check their debt levels. Are they already swimming in loans? Or are they financially stable and just raising cash for strategic reasons?

If the funds are being put to good use and there’s a clear plan, that’s a good sign.

Real Example: KCB Group’s Rights Issue

Take KCB Group, for instance. If the National Treasury, a major shareholder, publicly backs the rights issue and commits to buying more shares, it boosts investor confidence. It shows long-term belief in the company’s growth.

But if big shareholders stay quiet—or worse, opt out—you might want to rethink your participation.

Final Thoughts: Is It Worth It?

Rights issues can be a fantastic way to grow your investment—if you do your homework. Always consider the:

  • Discounted price

  • Shareholder behavior

  • Company’s reason for raising funds

  • Dilution risk

Sometimes, the best move is to jump in and buy more. Other times? You’re better off watching from the sidelines.

At the end of the day, make sure your money is going where your confidence is.