Rights allocation is the step in a rights issue in which existing shareholders are credited with subscription rights in proportion to the shares they own. The number each holder receives is found by applying the entitlement ratio in the offer terms to the position held at the record date. In a 1-for-4 issue, a holder of 1,000 shares is allocated rights to buy 250 new shares. The allocation gives practical effect to shareholders' pre-emption rights.
The central securities depository credits the rights to its participants as a separate, temporary security line, and custodians and brokers pass them on to client accounts. Positions that do not divide evenly produce a fractional entitlement, which is rounded or sold according to the terms. The term is also used for the later allotment of new shares to holders who took up their rights. The wider sequence is described under rights issue processing.