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What’s in it for shareholders in a rights issue

Board room activities of Indian corporates are on in full swing these days. And why not? With the changing business environment, every company wants to expand business and generate better benefits for its shareholders. Business sentiment in India has witnessed a sea change over the past few years, thanks to multiple policy changes. Foreign fund flow into the system in the past few months suggests investors’ confidence has improved significantly. Raising money for business growth is now very common, which has given more confidence to shareholders as well.

Rights issue is one of the modes of fund raising popular with Indian companies. Through this mode, the company makes an offer to existing shareholders to buy additional shares in the company at a discounted price (rights offer price) within a prescribed period. Unlike IPO, a rights issue is not offered to the general public, but only to the existing shareholders in proportion of their existing holdings. The eligible shareholders can either subscribe to the rights issue partly or fully; or can let the offer lapse by not opting to exercise their rights to purchase the additional shares; or can transfer their rights entitlements to other persons.

Nowadays, the transfer of rights to other persons can be done by the trading of rights entitlements on a stock exchange, just the way you transact equity shares, in a process known as ‘renunciation of rights issue’.

Rights entitlements

Rights entitlements are the shares offered to eligible shareholders in the ratio of their existing holdings as of the record date fixed by the company. By definition, rights entitlement is a temporary credit of shares to the demat account of the eligible shareholders, which enables them to apply for the rights issue or transfer the rights entitlements to other interested investors.

It is important to note that getting rights entitlement shares does not mean you have got the rights shares; you need to apply for the rights issue shares based on entitlements received.

Sebi has now dematerialised rights entitlements and made it mandatory for the companies to credit the rights issue entitlements to demat accounts of the eligible shareholders.

Some points one must keep in mind about the rights entitlements shares are as follows:-

  • The rights entitlements trade with different ISIN, NSE symbol and BSE scrip code.
  • The trading of rights entitlements commences on the issue opening date and generally closes 3-4 working days before the issue closure date.
  • No intraday trading is permitted in rights entitlements.
  • The settlement of rights entitlements happens on a T+2 (T being the trading day) basis.
  • Any shortages in rights entitlements shall be closed out directly
  • The rights entitlements trading is allowed in the pre-open market session, normal session, block window and post-market closing session.

Dates which are very important in the case of a right issue are record date, issue opening date, issue closure date, rights entitlement trading dates, allotment date, date of credit and date of commencement of trading or listing date.

Some of the other points shareholders should keep in mind:-

  • Right issue is an option one can avail, and not an obligation
  • To earn eligibility to apply for an rights issue, one must be a shareholder on the record date
  • Existing shareholders can opt for additional shares, but the allotment for the same would be based on the issue subscription.
  • The rights entitlements (RE) are given a different ISIN to differentiate from the normal equity shares trading in the market.
  • The trading of RE shares closes 2-3 working days before the rights issue closing date.

Shareholders should always study the company’s performance, purpose of raising fund – whether it is for expansion, acquisition, takeovers and debt reduction etc — before subscribing to the rights issue. Fund raising purposes are expected to result primarily from top line growth, efficient procurement and supply chain efficiencies.

For example, with its current right issue offer, Bharti Airtel intends to raise up to Rs 21,000 crore, which will give the company the fuel to shift to a higher gear and tap large opportunities by accelerating investment in the rollout of 5G services, fibre and data centre business. Now that can be a good case for investing in the business, which shows enough promise to good returns in the long run.

(DK Aggarwal is the CMD of SMC Investment and Advisors)

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