What Is the Difference Between FPO and Rights Issue: A Simple Guide for Indian Investors
Blog by Aliceblue News Desk
22 May 2026
18 minutes
When a listed company in India needs more money, it usually chooses between a follow-on public offer FPO and a rights issue. Both involve issuing additional shares after the initial public offering, but they work in different ways and affect investors differently. Understanding this difference helps you decide what to do when you see a new public issue in your trading platform or demat account.
To take part in any FPO or rights issue, you need an active demat and trading account with a registered broker. If you do not yet have one, you can first open a demat and trading account with us so that you are ready when such offers come.
Introduction
Many beginners get confused when they see a message like Company X announces rights issue or Company Y comes with an FPO. It is natural to wonder whether this is similar to an IPO, whether you should apply, and whether your existing shares will be affected.
Both FPO and rights issues are ways for a company that is already listed on NSE or BSE to raise fresh equity capital from investors. The difference between FPO and rights issue lies mainly in who can apply, how the price is set, and what happens to your ownership if you choose not to act. In this guide, we will stay close to how these work in the Indian market and what a retail investor should keep in mind.
If you are completely new to public issues, it can also help to read our IPO basics article before you look at FPOs and rights issues.
What Is an FPO?
A Follow-on Public Offer FPO is a fresh issue of shares by a company that is already listed on the stock exchange. The company uses this route when it wants to raise additional equity capital from the public after its IPO, for example, to fund expansion, repay loans, or strengthen its balance sheet.
An FPO is open to all eligible investors, including retail investors, high net worth investors, and institutions. You can apply during the issue period through your bank using ASBA or directly through the IPO or public issue section in your trading platform. The company files an offer document with SEBI, mentions why it is raising funds, and either sets a fixed price or announces a price band within which investors can bid.
What Is a Rights Issue?
A rights issue is an offer of new shares made only to existing shareholders of a listed company in a fixed ratio to the shares they already hold. The company fixes a record date, and all investors who hold the shares on that date become eligible for rights entitlements.
The issue price in a rights issue is usually lower than the current market price to encourage existing shareholders to subscribe. Eligible investors receive rights entitlements in their demat accounts, which give them the option to buy additional shares at the rights price. They are not forced to subscribe.
A rights issue is one of several corporate actions that can affect your holding, along with dividends, bonus issues, and stock splits. If you want a wider view of such actions, you can also refer to our corporate actions guide when you set up your learning path.
How an FPO Works
- The board of the company decides to raise funds through an FPO and approves the approximate amount and purpose.
- The company prepares a draft offer document with details on its business, financials, risk factors, and use of funds and files it with SEBI and the exchanges.
- A price band or fixed issue price is decided in consultation with merchant bankers after looking at demand and market conditions.
- During the issue window, investors apply for shares through ASBA using net banking or through the IPO or public issue section in their broker platform.
- After the issue closes, shares are allotted based on demand within each investor category, credited to demat accounts, and start trading along with the existing shares.
How a Rights Issue Works
- The company announces a rights issue, fixes a record date, and declares a rights ratio such as one share for every five held, along with the rights price.
- Rights entitlements are credited in demat form to all eligible shareholders based on this ratio.
- These rights entitlements can usually be traded on the stock exchange for a limited window, so those who do not want to subscribe can sell them to other investors.
- Eligible shareholders can apply for some or all of their rights, and may also request additional shares, using ASBA or their broker platform.
- After the rights issue closes, the company allots rights shares, credits them to demat accounts, and these new shares trade along with the old ones.
If you find the idea of record date confusing, it can help to read a record date and ex date explainer in our education section, because the same concept applies to dividends and other corporate actions as well.
Types of FPO: Dilutive and Non-dilutive
In practice, FPOs fall into two broad categories.
In a dilutive FPO, the company issues new shares. The total number of shares increases, so existing shareholders are diluted if they do not buy more, but the company receives fresh funds to use in its business.
In a non-dilutive FPO, often structured as an Offer for Sale, large existing shareholders, such as promoters or the government, sell part of their stake to the public. The number of shares in the market stays the same, and the money raised goes to these sellers, not to the company.
This is why, when you see an issue, it is important to check whether it is a fresh issue or mainly an offer for sale and what that means for your decision.
Why Companies Choose FPO or Rights Issue
Companies compare several points before deciding whether to use an FPO or a rights issue.
If the fund requirement is large and the company wants to widen its investor base, it may prefer an FPO, since it can tap new investors along with existing ones. Rights issues are often used for small to medium-sized raises and when the company wants to give preference to its current shareholders.
Rights issues are usually quicker and cheaper to execute than a full public FPO. SEBI and the exchanges have simplified the rights issue process and introduced demat rights entitlements, which have reduced paperwork and timelines. An FPO involves a more detailed book-building process, more marketing effort, and heavier documentation, which increases cost and time.
From a control point of view, a rights issue lets promoters and long-term shareholders maintain or increase their stake if they subscribe. In an FPO, if they do not participate in proportion, their ownership can fall as new investors come in.
Example of a Rights Issue
Suppose you hold two hundred shares of Company A, which trades at about three hundred rupees on the exchange. The company announces a rights issue in the ratio of one share for every four held for two hundred ten rupees per share. This means for every four shares you hold, you can buy one additional share at the rights price.
Your entitlement would be fifty shares because two hundred divided by four is fifty. If you subscribe fully, you pay ten thousand five hundred rupees, and your total holding becomes two hundred fifty shares. Your average cost per share changes because you now hold some shares bought at the original market price and some at the discounted rights price.
If you decide not to put in more money and rights entitlements are listed, you can sell your fifty entitlements on the exchange during the trading window and receive some value instead of letting them expire.
Example of an FPO
Now consider Company B, which is already listed and trades around four hundred rupees. It decides to raise a few thousand crores by issuing fresh shares through a book-built FPO in a price band of three hundred sixty to three hundred eighty rupees.
You apply through your broker platform for one hundred shares at a bid price of three hundred seventy rupees. If the final price is fixed at that level and you receive full allotment, you pay thirty-seven thousand rupees and get one hundred new shares in your demat account.
You did not need to be a shareholder before the FPO announcement. Any eligible investor who applied during the issue period could participate.
To see where active FPOs or rights issues appear in your platform and how the screens look, you can also refer to our step-by-step guide on applying for public issues.
Key Features of an FPO
- An FPO is done by a company that is already listed on the exchange.
- It is open to all categories of investors, including retail, high net worth, and institutional participants.
- Pricing is either fixed or within a price band and is decided with the help of merchant bankers after looking at demand and market conditions.
- The process is regulated with an offer document filed with SEBI, disclosures on financials and risks, and a clear statement on how the company will use the funds.
- An FPO can be dilutive when new shares are issued or non-dilutive when existing shareholders sell their shares through an offer for sale.
Key Features of a Rights Issue
- A rights issue is available only to existing shareholders on a specific record date in a fixed ratio, such as one share for every three or one for every five.
- The rights price is usually lower than the prevailing market price, so that the offer becomes attractive for existing shareholders.
- Rights entitlements are credited in demat form and can usually be subscribed to, renounced in part or in full, or allowed to lapse.
- If shareholders subscribe according to their rights, they can maintain their percentage holding in the company even though the total number of shares increases.
- The process has become more streamlined due to electronic entitlements, standardised timelines, and online application options.
Advantages for Investors
- With an FPO, you invest in a company that already has a trading history and public financial results, so you have more information than in an IPO. You can check past quarterly numbers, price movement, and regulatory filings before applying.
- FPO prices can sometimes be slightly lower than the current market price, which may give you a more attractive entry if you already like the business. Large issues can also increase free float and improve liquidity over time.
- With a rights issue, existing shareholders can maintain or even increase their stake at a discounted price if they believe in the long-term prospects of the company. They also have flexibility, because they can sell their entitlements and realise some value if they do not want to commit more capital.
Risks and Limitations
- In a dilutive FPO, profits are spread across a larger number of shares, so earnings per share can fall in the near term, and this can affect valuations. A large FPO also increases supply in the market, which can put pressure on the share price when new shares are listed and some investors book quick gains.
- There is also execution risk. The company has to use the fresh capital effectively to improve its business or balance sheet. If expansion plans or debt reduction do not work as expected, the share price may not benefit in the way investors hope.
- In a rights issue, if you neither subscribe nor sell your entitlements, they lapse and become worthless after the issue closes. Your percentage holding in the company falls because total shares have increased while your own count stays the same.
- Rights issues are sometimes used by financially stressed companies to raise funds. If the underlying problems are not fixed and the business does not recover, shareholders can face further decline in value even after putting in more money.
Difference Between FPO and Rights Issue in Simple Terms
An FPO is a follow-on public offer by a listed company in which both existing shareholders and new investors can apply, similar in structure to an IPO but coming later in the company’s journey. A rights issue is a fresh offer made only to existing shareholders on a record date in a fixed ratio to their current holdings.
In an FPO, allocation is based on bids and category-wise quotas. In a rights issue, the initial entitlement is based on how many shares you already hold, and you get the first chance to take those shares or renounce that right to someone else.
FPO pricing is set through book building or at a fixed level that is often near the current market price. Rights issue pricing is usually set at a clear discount to the market price.
From the company side, an FPO is useful when it wants a large amount of capital and a wider investor base. A rights issue is useful when the company wants to raise money at a lower cost and give preference to existing shareholders.
FPO vs Rights Issue key differences in one view
Aspect | FPO Follow-on Public Offer | Rights issue |
Who can apply | Any eligible investor, including existing and new investors. | Only existing shareholders on the record date. |
Basis of entitlement | Allocation based on bids and category-wise quotas is similar to an IPO. | Entitlement based on current shareholding in a fixed ratio, for example, one share for every five. |
Main objective | Raise larger capital and widen the investor base after listing. | Raise funds while giving preference to current shareholdersrmoneyindia+1 |
Pricing | Fixed price or price band is often near the current market price. | Usually set at a clear discount to market price. |
Type of issue | Can be a fresh issue, dilutive, or an offer for sale, non-dilutive. | Fresh issue of shares that increases share capitalinvestorgain+1 |
Impact on ownership | Existing shareholders are diluted in a fresh issue FPO if they do not buy more. | Existing shareholders can avoid dilution by exercising their rights; otherwise, their stake falls. |
Investor priority | No built-in priority for existing shareholders; everyone applies together. | Existing shareholders get the first right to subscribe before others. |
Entitlements trading | No separate entitlement security is created. | Rights entitlements are credited in demat form and are usually tradeable for a limited period. |
Process and cost | More extensive process similar to IPO with a detailed offer document and marketing. | Generally quicker and less expensive due to a simplified rights issue framework. |
Rights Issue Choices for Shareholders
- When rights entitlements appear in your demat account, you usually have these options, as described in SEBI material and broker FAQs.
- You can subscribe fully to all your entitlements and keep your ownership percentage unchanged.
- You can subscribe fully and also apply for additional shares. If other shareholders do not use their rights, the company may allot some extra shares to you.
- You can subscribe for part of your rights and sell the remaining entitlements on the exchange during the trading window.
- You can sell all your entitlements in the market if you do not want to invest more, but still want to get some value.
- You can ignore the issue, but then the entitlements expire, and you get nothing while your ownership percentage goes down.
For most long-term investors, it is better to either subscribe to or sell the entitlements rather than let them lapse.
What Are Rights Entitlement Shares and How to Trade Them on NSE/BSE?
When a rights issue is announced, what actually lands in your demat account isn’t a share yet — it’s a Rights Entitlement (RE), a temporary security that gives you the right to buy the rights shares, and can itself be bought or sold on the exchange during a short window.
What an RE actually looks like in your account
REs are credited under a separate ISIN, distinct from your regular shares, typically shown with a ticker like “COMPANYNAME-RE.” It behaves like a stand-in security – you can see it, trade it, or simply let it sit, but it isn’t the rights share itself until you actually subscribe.
The trading window
REs generally trade on both NSE and BSE for about 4 to 7 trading days. By rule, this window has to close at least 4 days before the rights issue itself closes, so you have less time to act on your entitlement than you do to subscribe to the actual rights shares. This is the window this guide’s “Common Mistakes” section is really pointing to when it warns about entitlements expiring; once this trading period ends, selling them is no longer an option; subscribing (or letting them lapse) are the only paths left.
How the price is set
On the first day of RE trading, the reference opening price is calculated as the parent stock’s closing price minus the rights issue price. After that, the RE trades purely on market demand and supply, like any listed security, which means its price can move meaningfully within just a few days.
A real example of how active this can get
When SEBI introduced RE trading in 2020, Reliance Industries’ RE (RIL-RE) surged 14% in a single session to end at ₹230 on NSE, with nearly ₹150 crore changing hands on NSE and another ₹554 crore on BSE, just before its trading window closed. It’s a clear illustration that REs aren’t just a paperwork formality — they can trade with real volume and real price movement in their short life.
How to actually trade one
You place an order for the RE exactly the way you’d trade any listed stock, through your regular broker platform, using the RE’s own ticker symbol, during normal market hours within the trading window. No separate account or process is needed.
The tax difference worth knowing
Selling REs on the exchange attracts Securities Transaction Tax (STT) at 0.1%, paid by the seller. Any gain from selling REs is taxed as short-term capital gains, regardless of how long you’ve held the underlying shares — a different tax treatment from the parent stock itself.
If you’re not an existing shareholder
You can still participate in a rights issue by buying REs on the open market during this trading window, then applying for the rights shares using those purchased entitlements – see this guide’s earlier FAQ on participating without being an existing shareholder for how that works in practice.
Common Mistakes Beginners Make
- Many investors see rights entitlements in their demat account and assume they are normal shares or some kind of free bonus. They do nothing and later realise that these entitlements have expired without any value.
- Some investors look only at the discount and treat every FPO or rights issue as a bargain. They do not check why the company is raising funds, what its debt level is, or how promoters are participating, and they sometimes end up in weak or stressed businesses.
- A few investors buy shares after the record date, expecting to get rights benefits, but entitlements go only to those who held the shares on the record date.
- Another mistake is to put a large part of the portfolio into one attractive-looking issue without thinking about diversification and sector risk.
Who Should Consider FPO or Rights Issue
An FPO may suit investors who already follow a company, understand its business and sector, and want to increase their exposure based on its track record and valuation. It also suits investors who are comfortable reading offer documents and comparing the issue price with the current market price and with peers.
A rights issue mainly concerns existing shareholders. If you are a long-term investor and still believe in the company, a rights issue can be an opportunity to maintain or increase your stake at a lower price. It is more suitable for those who keep track of corporate actions and record dates and can act within the timelines, either by subscribing or selling entitlements.
If you are not willing to commit more capital to the same company, or you are not confident about its fundamentals, it can be more sensible to sell the entitlements rather than subscribe just because the price looks low.
Conclusion
FPOs and rights issues are both common ways for listed companies in India to raise fresh equity capital, but they target different groups and have different implications for your ownership and risk. In an FPO, anyone who qualifies can apply, while in a rights issue, only existing shareholders get the first opportunity to buy shares at a discount in a fixed ratio.
Before acting on any such offer, it helps to check why the company is raising money, how healthy its finances look, what price you are being asked to pay, and what happens to your stake if you ignore the offer. You can also build your base by reading our IPO basics article and corporate actions guide so that FPOs and rights issues fit into a clear overall picture of how companies interact with shareholders.
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Blog by Aliceblue News Desk
