If you own shares in a listed company in Pakistan and receive a notification about a “rights issue,” you’re facing a decision that could affect the value of your investment. At its core, a rights issue is when a company offers its existing shareholders the right to purchase additional shares before anyone else. This offerance is typically priced below the current market rate. Think of it as an exclusive first offer extended to you simply because you’re already a shareholder.
One important distinction: this is not the same as buying shares through your broker on the PSX trading floor. Rights shares are offered directly by the company through a formal process managed by the Central Depository Company (CDC).
Why Do Companies Issue Rights?
Companies raise fresh capital through rights issues for a variety of strategic and operational reasons:
- Expansion plans — such as a textile company purchasing new machinery or a bank growing its branch network.
- Debt reduction or restructuring — Companies using rights issues to pay down their borrowing and reduce their interest burden.
- Working capital requirements — Day-to-day business operations require liquidity, and companies can sometimes find themselves short on the cash needed to purchase raw materials, pay suppliers, or manage seasonal demand cycles.
- Acquisitions and new projects — Acquiring another business or investing in a large new project takes substantial capital. Rights issues are a route for financing such moves, particularly in capital-intensive sectors.
- Meeting regulatory capital requirements — Banks and insurance companies are required by their regulators to maintain a minimum level of capital at all times. When these thresholds are raised, as has happened with Pakistani banks under SBP guidelines, a rights issue is often the most practical way to meet the new requirement while keeping existing shareholders in the fold.
Key Dates, Ratios, and Your Entitlement
Understanding a few key terms will help you navigate the process confidently.
Rights Issue/Ratio: This tells you how many new shares you can buy relative to what you already hold. A 25% rights issue means for every 4 shares you own, you are entitled to purchase 1 new share.
Issue Price: Rights shares are generally offered at a 10–30% discount to the market price, though it is possible (and extremely rare) for them to be priced at a premium.
Book Closure Date: The date on which the company’s shareholder register is frozen. You must be a registered shareholder before this date to receive your entitlement.
Ex-Rights Date: The date on which the share price adjusts to reflect the upcoming issuance of new shares at a revised price.
Rights Entitlement Trading Period: Before the subscription window opens, the rights entitlements themselves trade on PSX for a limited period. This means that if you have not yet decided whether to subscribe, you can buy or sell these entitlements in the open market.
Quick example: You own 500 shares of ABC Limited. The company announces a 20% rights issue. Your entitlement = 500 × 20% = 100 new shares.
Your Two Options as a Shareholder
Option 1 — Subscribe: You fill out the subscription form (sent via CDC) and pay for your new shares either through your broker or directly to the company’s designated bank. Under PSX regulations, the subscription window must remain open for a minimum of 15 days (Two Weeks) and no more than 30 days.
Option 2 — Sell Your Rights: If you don’t wish to invest more capital, you may be able to sell your rights entitlement on PSX during the trading window. This allows you to realise some value from your entitlement without subscribing.
Understanding TERP — What Happens to the Share Price?
The Theoretical Ex-Rights Price (TERP) is what the share price should theoretically settle at after the rights issue. It helps you understand the real economic impact on your portfolio.
Formula: TERP = (Market Price × Existing Shares) + (Issue Price × New Shares) ÷ (Existing Shares + New Shares)
Worked Example:
- Current market price: PKR 100 | You own: 400 shares (worth PKR 40,000)
- Rights issue ratio: 25% | Issue price: PKR 80
- Your entitlement: 400 × 25% = 100 new shares
(100 × 400) + (80 × 100)(400 + 100)
48000/500
TERP= 96
On the ex-rights date, the share price drops from PKR 100 to PKR 96. But if you subscribed to the entitlement, your portfolio will be intact since you now hold 500 shares worth PKR 48,000. You invested PKR 8,000 in the company and as a result of that investment, you were able to maintain your ownership percentage in the company. If you did not subscribe, your 400 shares are now worth PKR 38,400, a loss of PKR 1,600 in value and a reduction in your percentage ownership of the company.
Real Examples from Pakistan
In August 2023, Treet Corporation used its rights issue primarily for debt repayment, directing approximately 76% of the proceeds toward reducing its debt burden. Meanwhile, in May 2025, Dost Steels announced a rights issue with shares offered at a par value of PKR 10 per share to fund its business expansion plans.
Similarly, JS Bank conducted a rights issue in 2023, offering 17 new shares for every 100 held at PKR 10 per share. The proceeds were used to fund cash payments to minority shareholders of BankIslami, as part of JS Bank’s takeover of the Islamic bank.
Should You Subscribe?
There is no one-size-fits-all answer. Here are the key factors to consider before you decide:
- Review the company’s last three years of financial performance on the PSX. Examine its profit trends, debt levels, and dividend history.
- Read the offer document carefully to understand why the company is raising funds. Capital raised for growth is generally more reassuring than funds raised to plug cash flow problems.
- Compare the issue price to the current market price. A meaningful discount is a positive signal, but it doesn’t guarantee the investment will pay off.
- Calculate your required outlay. Multiply your entitlement by the issue price and ask yourself whether you can afford it without straining your finances.
- Factor in the broader market and sector outlook. A company in a strong sector with solid fundamentals is a better candidate for participation.
Key Takeaways
- A rights issue gives you priority access to new shares at a discount before the general public.
- If you don’t participate, your ownership percentage is diluted and your share value may decline.
- In Pakistan, the process runs through CDC and your broker. Check your notifications and letters of offer promptly, as the subscription window is limited.
- Use the TERP formula to understand the real price impact and make an informed decision.
Read Next:
https://finqalab.com/blog/bonus-shares-vs-stock-splits-a-clear-guide-for-pakistani-investors/