Investing Basics

What a rights issue is and what to do when you get one

A rights issue is not free money. Learn how dilution, nil paid rights and shareholder choices work before you answer a cash call today.

By Ben Walker · May 22, 2026

A rights issue can look like a bargain at first glance: buy extra shares at a discount, usually before everyone else. The awkward bit is that it is not a gift. It is the company asking existing shareholders for more money, and how you respond depends on understanding what is actually on offer.

Reviewed by Priya Nair, Editorial Director · May 22, 2026, 22:04

In this article

The Short Version

Key Takeaways

A rights issue gives existing shareholders the right to buy new shares, usually in proportion to what they already own.
The headline discount is not free money, because the share price normally adjusts once the new shares are taken into account.
If you do nothing, your percentage ownership is usually diluted. In some cases, tradable nil paid rights may still have value.
Your main job is to read why the company is raising money, what happens if you act or do nothing, and whether your original investment case still holds.

What a Rights Issue Is

A rights issue is a way for a company to raise fresh cash by offering new shares to existing shareholders. The offer is normally made in proportion to what shareholders already own, such as one new share for every four existing shares. If you take up the rights, you pay more money and receive more shares. If you do not, you may own a smaller percentage of the company after the issue.

Companies use rights issues for different reasons. Sometimes the money is defensive: debt reduction, balance-sheet repair, funding losses, or satisfying lenders. Sometimes it is more constructive: funding an acquisition, supporting a regulated investment programme, or giving the business room to grow. This type of fundraising is not inherently good or bad news; the reason for it is everything.

How The Discount Really Works

The discount is where many people trip up. If a share trades at 100p and the company offers new shares at 60p, it feels as if you are being handed 40p of value. Usually you are not. The old shares and the new shares belong to the same enlarged company. Once the shares trade ex-rights, the market price normally adjusts to reflect the extra shares issued at the lower price. The better comparison is the theoretical ex-rights price, or TERP, which is the weighted average price of the old shares plus the new shares combined. It tells you the arithmetically fair point, which is the anchor to use when the headline discount feels too good to be true.

Dilution and Nil Paid Rights

Dilution needs care too. Percentage dilution means your slice of the company gets smaller if you do not buy your entitlement. Economic dilution means your wealth has actually been damaged. The process tries to protect existing shareholders by giving them the chance to participate, or sometimes sell that right, but broker deadlines, dealing costs, tax position and market movements can all affect the result.

In a traditional rights issue, the entitlement may be renounceable, which means it can sometimes be sold to someone else. This is where nil paid rights come in. HMRC describes the provisional allotment letter as usually requiring no payment at first, so it is said to be nil paid. If those rights are renounceable, they can have market value before the shareholder pays to turn them into fully paid shares. London Stock Exchange guidance says trading in nil-paid rights begins on its MTF at the start of business on the ex-rights date. Your broker or registrar notice should tell you whether your rights are tradable and what deadline applies.

Your Practical Choices

Your usual choices are practical. You can take up the rights, paying the subscription money and receiving the new shares. You can sell the rights if they are tradable, which may let you recover some value without increasing your holding. You can let the rights lapse or do nothing, but that can be costly if the rights had value or if your broker deadline passes before you notice. You can also consider selling the original shares if the cash call changes your view of the business.

A rights issue is not the same as an open offer or a placing. The key difference is that a rights issue is usually made to all existing shareholders pro rata and the entitlement may be tradable. An open offer entitlement is usually not tradable. A placing typically means new shares are sold to selected investors, often institutions, and ordinary retail holders may not get the same chance to maintain their proportional ownership.

What To Check Before You Act

Before acting, read the announcement carefully. Check whether the money is for survival, debt reduction, regulation, acquisition or expansion. Note the gross proceeds, ratio, issue price, record date, ex-rights date, acceptance deadline and when the new shares start trading. Read the risk factors, not just the upbeat paragraph. The FCA says prospectuses and shareholder circulars may need to be submitted for review and approval before publication, giving you a structured document to interrogate.

Then compare the rights issue with your original reason for owning the share. If you bought because the company had a strong balance sheet, a heavily discounted emergency raise may challenge that view. If you bought because you believed in a turnaround, the raise might be part of the plan, but it still asks you for more capital. Fundamental analysis helps here: the question is not whether the offer looks cheap, but whether the enlarged company is worth owning after the raise.

A Worked Example

In January 2025, Pennon Group announced a fully underwritten rights issue of about £490 million at 264p per share. The company stated the issue price represented a 35.2% discount to the TERP, and that shareholders who did not take up their rights could be diluted by up to 39.4%. It is a useful illustration of the details to look for: purpose, ratio, issue price and dilution.

For a simpler numerical example: imagine you own 400 shares at 100p each, worth £400. The company announces a one-for-four rights issue at 60p. You can buy 100 new shares for £60. Before the offer, four old shares at 100p equal 400p in total. Add one new share at 60p and the enlarged five-share package is worth 460p. Divide 460p by five and the TERP is 92p. If you take up your rights, you spend £60 and end up with 500 shares worth £460 at that theoretical price. No free gain: you have kept your proportional position by contributing more capital.

If you do not want to put in more cash but the rights are tradable, the nil paid rights might have value. In this example, the theoretical nil paid value is roughly 32p each: the 92p TERP minus the 60p subscription price. In practice, dealing costs matter and the actual market value may differ from the calculation.

What This Means For You

If you receive a corporate action notice from your broker, do not treat it as routine admin. These events come with deadlines, and broker deadlines can be earlier than the official company deadline. Read the broker message, then read the company announcement or prospectus summary. If you hold shares through an ISA or investment account, check whether you need available cash in that account to take up the rights.

Your decision should start with four questions: do I understand why the company needs money; do I still want to own more of this company after the raise; what happens to my holding if I take up, sell, or ignore the rights; and are the costs, tax position and account rules clear enough for me to act? Cristoniq’s guides to reading annual reports and checking the FCA register can help you separate company evidence from sales noise.

In Plain English

A rights issue means the company is passing the hat round its existing shareholders. You may get first refusal on new shares, often at a lower price, but you are still being asked to add more money to the same investment. The sensible question is not “how big is the discount?” It is “why does the company need this cash, what happens if I do nothing, and do I still want this share after the raise?”