Whenever a company makes a fresh ISSUE of shares, it has an impact on the existing shareholders since their proportionate holding in the share capital of the company gets diluted. For example, a company may have 10 LAKHS shares of Rs.10 each, amounting to an issued and paid-up capital of Rs. 1 crore. If it issues another 10 lakhs shares, to increase its capital, the proportion HELD by existing shareholders will come down by half, as the issued and paid up capital has doubled. This is called as dilution of holdings.

To prevent this, section 81 of the Company’s Act requires that a company which wants to RAISE more capital through an issue of shares must first OFFER them to the existing shareholders. Such an offer of shares is called a rights issue.

Whenever a company makes a fresh issue of shares, it has an impact on the existing shareholders since their proportionate holding in the share capital of the company gets diluted. For example, a company may have 10 lakhs shares of Rs.10 each, amounting to an issued and paid-up capital of Rs. 1 crore. If it issues another 10 lakhs shares, to increase its capital, the proportion held by existing shareholders will come down by half, as the issued and paid up capital has doubled. This is called as dilution of holdings.

To prevent this, section 81 of the Company’s Act requires that a company which wants to raise more capital through an issue of shares must first offer them to the existing shareholders. Such an offer of shares is called a rights issue.