What is a Right Issue?
A Right Issue is a way for a listed company to raise funds by offering additional shares to its existing shareholders at a discounted price. This offer is made in a specific ratio based on how many shares the shareholder already owns. For example, in a 1:5 Right Issue, for every 5 shares you hold, you get the right to buy 1 additional share at a reduced rate.
The key point is only existing shareholders as of the record date are eligible to receive this benefit.
When the Right Issue is announced, eligible shareholders receive a special entitlement in their demat account called the RE (Right Entitlement.)
What is Right Entitlement (RE)?
Right Entitlement (RE) represents the shareholder’s right to participate in the Right Issue. This is not a share itself, but a right that allows the investor to apply for shares at the offered price during a limited window.
Once credited, RE shows up in your demat account and can be either
- Used to apply for the shares
- Sold in the stock market (if allowed)
- Left unused (it expires after a few days)
Types of Right Entitlement (RE)
There are two types of Right Entitlements in the stock market:
1. Renounceable Right Entitlement
A renounceable right entitlement allows the shareholder to trade or sell the entitlement on the stock exchange during the specified RE trading period. This provides flexibility to investors who may not wish to subscribe to the additional shares themselves. You can sell your RE to another investor, who can then use it to apply for shares at the discounted price offered in the rights issue. These tradable REs are listed on the exchange with a unique symbol (e.g., ABC-RE) and are bought and sold like regular stocks through your demat and trading account. Most listed companies prefer to issue renounceable rights, as it offers more liquidity and choice to existing shareholders
2. Non-Renounceable Right Entitlement
This type of Right Entitlement (RE) cannot be sold or traded in the stock market. It is exclusively reserved for the eligible shareholder who held the shares as of the record date. If the shareholder chooses not to apply for the offered shares during the application window, the RE will automatically lapse upon expiry, resulting in the loss of that opportunity. To determine whether the RE you received is tradable or non-tradable, you can either refer to the company’s official Right Issue offer document or check the RE’s trading status through your stockbroker’s app or website, such as Zerodha, Groww, Upstox, or Angel One
Shari’ah Perspective on Right Entitlement
From an Islamic finance point of view, the concept of selling RE is not permissible.
Let’s understand why.
1. Selling a Mere Right
RE is not a tangible asset. It’s only a right to apply for shares. Selling such a right is like selling a promise, which is not allowed in Shari’ah because you’re not transferring ownership of a real asset.
2. Gharar (Uncertainty)
There is uncertainty in what the buyer is actually getting. They may or may not get the shares. Shari’ah prohibits transactions with excessive ambiguity or risk.
3. Resembles Options Trading
Selling RE is similar to options trading, where you buy or sell rights without owning the underlying asset. Scholars have widely ruled options as non-compliant with Islamic finance.
What Do Islamic Scholars Say?
According to several global Shari’ah boards, including AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions):
“Selling of Right Entitlement is not Shari’ah-compliant as it involves trading a non-existent or non-owned asset.”
What Should a Shari’ah-Conscious Investor Do?
If you receive RE, you have two Shari’ah-compliant choices:
1. Apply for the shares by paying the required amount (if the stock is halal).
2. Let the RE expire without taking any action.
Avoid selling RE, even if it’s tradable, as per Islamic finance principles.
Conclusion: Is Selling RE Halal or Not?
In conclusion, while Right Entitlement is a legitimate concept in the stock market, selling it is not permissible in Islam. It involves uncertainty, no real asset exchange, and resembles prohibited forms of trading.
Right Issue is halal in itself if used to buy shares of Shari’ah-compliant companies, but the sale of RE in the market is not Shari’ah-compliant.
As an ethical Muslim investor, you should either apply for the shares or let the right expire and avoid trading RE in the stock market.