A rights issue involves selling of common shares to existing shareholders of the company on a prorata basis. Shares becoming available on account of non-exercise of rights are allotted to shareholders who have applied for additional shares on a pro-rata basis. Any balance of shares can be sold in the open market.

 When rights are issued the shareholder has three options available:

 (a) He can exercise the rights and therefore buy the new shares

(b) He can sell the rights in the market

(c) He can ignore the rights

The number of rights required to buy one new share can be given by the following formula

                         N = S_o

                           S

 Where S_o is the number of existing shares

S is the number of new shares to be sold

N is the number of rights required to buy one new share