rights issue: what are the advantages for shareholders of a rights issue
One of the popular fundraising methods for Indian companies is rights issuance. Through this mode, the company offers existing shareholders to purchase additional shares of the company at a reduced price (rights offering price) within a prescribed period. Unlike the IPO, a capital increase is not offered to the general public, but only to existing shareholders in proportion to their existing holdings. Eligible shareholders can either subscribe to the capital increase in whole or in part; or may allow the offer to expire by choosing not to exercise their rights to purchase the additional shares; or can transfer their rights to other people.
These days, transferring rights to other people can be done by trading rights on a stock exchange, just like you trade stocks, in a process known as a “rights issue waiver”. .
Rights and rights
The rights to rights are the shares offered to eligible shareholders in the proportion of their existing holdings on the registration date set by the company. By definition, the right to rights is a temporary credit of shares to the demat account of eligible shareholders, which allows them to request the issue of rights or to transfer the rights to other interested investors.
It is important to note that getting the rights shares does not mean you have the rights shares; you must apply for the rights issue shares on the basis of the rights received.
Sebi has now dematerialized rights to rights and made it compulsory for companies to credit rights issue rights to the demat accounts of eligible shareholders.
Some points to keep in mind about stock rights are: –
- The rights are traded with different ISINs, symbol NSE and script code BSE.
- Trading of rights to rights begins on the opening date of the issue and generally ends 3 to 4 business days before the closing date of the issue.
- No intraday trading is authorized on subscription rights.
- The payment of rights to rights is made on a T + 2 basis (T being the trading day).
- Any shortfall in rights must be addressed directly
- Trading of rights is authorized during the pre-opening session of the market, the normal session, the blocking window and the post-market closing session.
The dates which are very important in the case of a rights issue are the recording date, the opening date of the issue, the closing date of the issue, the trading dates of the rights of use, the grant date, the credit date and the start date of trading or the listing date.
Some of the other points that shareholders should keep in mind:
- Issuance of rights is an option that can be availed, not an obligation
- To be eligible for a rights issue request, you must be a shareholder on the registration date.
- Existing shareholders may opt for additional shares, but the allocation of these would be based on the issue subscription.
- Rights to Rights (ROEs) are given a different ISIN to differentiate them from normal shares traded in the market.
- Trading in RE shares ends 2 to 3 business days before the closing date for the issuance of the rights.
Shareholders should always consider the performance of the company, the purpose of fundraising – whether for expansion, acquisition, buyouts and debt reduction, etc. – before subscribing to the capital increase. Fundraising goals are expected to result primarily from revenue growth, purchasing efficiency and supply chain efficiency.
For example, with its current rights issuance offer, Bharti Airtel intends to increase to Rs 21,000 crore, which will give the company the fuel to take it up a notch and exploit great opportunities. by accelerating investments in the deployment of 5G, fiber and enterprise data center services. Now, that can be a good argument for investing in the business, which holds enough promise for good long-term returns.
(DK Aggarwal is the CMD of SMC Investment and Advisors)