What is the primary purpose of a Rights Issue under the Companies Act, and what options are available to an eligible shareholder who receives Rights Entitlements (RE)?

[ A ]To forcibly confiscate 50% of the shareholder's existing portfolio without compensation.

[ B ]To offer new shares to existing shareholders in proportion to their holding to prevent ownership dilution (typically at a discount); shareholders can: (1) subscribe to their entitlement, (2) renounce (sell) their rights on the stock exchange, or (3) let the rights lapse.[ CORRECT ]

[ C ]To convert all equity shares into non-redeemable preference shares with zero voting rights.

[ D ]To require mandatory physical delivery of raw industrial commodities within 24 hours.

Takeaway

Option B is correct: To offer new shares to existing shareholders in proportion to their holding to prevent ownership dilution (typically at a discount); shareholders can: (1) subscribe to their entitlement, (2) renounce (sell) their rights on the stock exchange, or (3) let the rights lapse.

Derivation

Under Section 62 of the Companies Act, 2013, when a company raises fresh equity capital, it must first offer pre-emptive rights to existing shareholders in proportion to their shareholding to protect them from ownership dilution. Rights are typically offered at a discount to market price. An eligible shareholder on the record date receives Rights Entitlements (RE) and has three distinct choices: (1) Exercise the right and apply for shares, (2) Renounce (trade/sell) the RE on the stock exchange to another investor for cash, or (3) Take no action and let the rights lapse. The subscription window is open for 15 to 30 days. This tests rights issue mechanics. The common error is assuming participation is mandatory.

Why the others fail

A — To forcibly confiscate 50% of the shareholder's existing portfolio without compensation.

A rights issue is a voluntary investment opportunity to purchase shares at a discount and does not confiscate investor assets.

C — To convert all equity shares into non-redeemable preference shares with zero voting rights.

Rights issues offer ordinary equity shares to maintain equity voting ownership, not non-voting preference shares.

D — To require mandatory physical delivery of raw industrial commodities within 24 hours.

Rights issues are financial capital-raising transactions executed in demat form, having no connection to commodity deliveries.