A rights issue is a popular method for firms to source funds by selling more shares to existing shareholders at a price lower than the market price. Often, this is done to fund expansion, reduce leverage, or provide more stability. To preserve their ownership percentage, shareholders are permitted to purchase more shares in proportion to their current holdings. The discounted price, which may provide value if the company’s stock performs well, is the main advantage for shareholders.
Participating in a rights issue, however, must be carefully considered. First, shareholders must be aware of how to apply for a rights issue. Examining the offer, choosing whether to subscribe, and submitting the application through the broking account or the company’s registrar are the steps involved.
What is a rights issue?
It is important for retail investors to understand what is rights issue. A rights issue is an offering of rights made to a company’s current shareholders, granting them the option to purchase more shares at a reduced price directly from the firm instead of purchasing them on the secondary market. The amount of extra shares that can be purchased is dependent on the current shareholdings of the shareholders.
Although certain rights issuances may be underwritten if the firm needs to guarantee the amount of cash obtained, the method may allow the company to raise money without necessarily paying underwriting costs. The quantity of extra shares that shareholders may acquire is typically proportionate to their current shareholding, and these rights are often granted as a dividend.
With a rights issue of shares, current shareholders receive preferential treatment and have the option to buy shares at a discount on or before a designated date. Up to the time when new shares can be acquired, current shareholders are also entitled to trade with other interested parties in the market. The trading of the rights is comparable to that of regular equity shares.
What is rights entitlement?
A company’s current shareholders are granted a specific advantage known as a rights entitlement (RE). A rights issue is a procedure by which a business can offer extra shares to its present owners to obtain more money. Before these new shares are made available to the general public, shareholders with rights entitlement can purchase them at a reduced price. It serves as a means for the business to honour the commitment of its shareholders.
Rights Entitlements are deposited into shareholders’ demat accounts upon the announcement of a rights issue by the corporation.
REs refer to the option to buy more shares at a reduced price. Consider it as a coupon that allows you to purchase additional shares at a discounted price. Similar to ordinary shares, rights entitlements are exchanged on stock exchanges. It normally only lasts a few days through this trade time. Depending on your investing plan, you can purchase or sell REs during this period.
Shareholders who choose not to subscribe to the rights issue can still profit from the opportunity by trading REs. REs can be sold for a profit, and purchasers can buy these rights if they were not allocated during the first round. The main use for the rights entitlement is that it opens the easy path for the trader or investors to acquire a company’s shares in the secondary market.
What options are available to an eligible equity shareholder in a rights issue?
Through a rights issue, shareholders can acquire more shares at a lower cost before the company makes them available to the public. However, while taking part in a rights issue, shareholders should know the choices available on how to buy rights issue shares. We will discuss the options available to a qualified equity shareholder in a rights issue in detail.
Exercising the rights entitlement
The primary option available to shareholders is to exercise their rights entitlement. This entails acquiring the extra shares that are being offered at a discounted rate. Shareholders have the ability to retain or even grow their shareholding in the firm by exercising their rights. If the business is doing well, this may be especially beneficial since it enables owners to buy shares at a discount to their present market value, which could fetch good returns in future.
You will need to fill out the application that your broker provides to purchase shares with rights entitled. You will be asked to fill out this form with the quantity and price of additional shares you wish to buy. A deadline is set by the corporation when it grants a rights entitlement. It is within this time frame—referred to as the “exercise date”—that shareholders may exercise their option to acquire more shares.
Renouncing the rights entitlement
The act of offering up, selling, or transferring rights to other interested investors at a higher price is known as a renunciation of rights entitlements. A shareholder has the option to resign his rights rather than allow them to expire if he is not interested in the rights entitlements offered by the company.
The stock market’s rights entitlement trading mechanism, known as “On-Market Renunciation,” allows rights to be renounced on the exchange floor for a higher price. Renunciation on the market is only permitted until the final day of trading for rights entitlement, which is typically three to four working days prior to the issue closure date.
In off-market renunciation, the seller and potential buyer can decide on a price together and finish the renunciation off-market. Until the issue closing date, the off-market renunciation is permitted.
Selling on secondary markets
Additionally, shareholders have the choice to sell their claim to rights on the secondary market. If the rights are marketable, this option becomes much more valuable. By selling the rights, stockholders may take advantage of the offer without really needing to make any more financial investments. The gap between the rights issue price and the current market price of the shares usually influences the rights sale price. Shareholders may be able to sell the rights for more money if there is a market for them. For shareholders who seek to profit financially from the rights issue without taking part in it or want to realize benefits right now, this alternative may be appealing.
Lapse of the entitlement
Shareholders’ rights will be deemed to have lapsed if they fail to exercise, renounce, or sell the rights as may be allowed within the stipulated time. In such a scenario, the company can offer the shares to other investors if the shareholder is unable to purchase more shares at a cheaper price. As the shareholder misses out on potentially profitable opportunities to invest, the lapse of rights is usually considered the least desirable. If the shareholder expects the price per share to decrease in the future or if they believe that the extra investment is not within his budget, this can also be strategic.
Based on the financial goals of the shareholder and market situation, each option offers possibilities for gains and losses. By being aware of these choices, shareholders can align their actions with their investing plan during a rights issue.
How to apply for rights issues?
Through a rights issue, a business may provide more shares to its current shareholders in proportion to the amount of shares they now own. The issuance might be intended to lower debt, finance a new project, or reorganize the company’s equity capital basis. In most cases, the shares made available through a rights issue are available for less than the market price. Before applying for rights issues, one should understand how to apply for rights issues online.
Through ASBA
Use the Application Supported by Blocked Amount (ASBA) feature through net banking to subscribe for rights shares by following the same procedure as for IPO applications. This facility is provided by banks such as HDFC, ICICI, Axis, SBI, and others. Here’s how to buy rights issue shares online.
- Open the mobile app or net banking page from your bank.
- Navigate to the section that lists rights offerings, IPO/FPO/Buyback.
- Choose the preferred rights issue.
- Give your broker’s demat account information, such as the demat account number and DP ID.
- Enter the number of shares that you wish to buy.
- Make sure your bank account has enough funds.
- After agreeing to the terms and conditions, place your order.
Fill out the Composite Application Form (CAF), which may be found on the BSE and NSE websites or supplied by the company’s registrant, to take part in a rights offer through the Offline ASBA procedure. Enter your PAN number, your cheque or DD information (non-ASBA), your choice of Depository Participant (NSDL or CDSL), and your DP data (verify with your broker). Fill out the application and submit it at any branch of the Self-Certified Syndicate Bank (SCSB).
Through the RTA
Visit the RTA website, such as KFin Technologies, to apply for rights shares by following the following steps:
- Go to the KFin Technologies Page on Rights Issue.
- Select “Email and Mobile Registration.”
- Select between physical and demat shareholdings through CDSL/NSDL.
- After entering your client ID, DP ID, and captcha, click “Submit.”
- Provide your email address and mobile number.
- Submit an application for the rights shares and pay with net banking or UPI.
- You will receive an email with application details after placing your order.
- The shares will be credited to your demat account at the closing of the rights issue.
Conclusion
A rights issue helps businesses raise money and provides existing shareholders a lucrative opportunity to buy more shares at a reduced price. To optimize this prospect, shareholders ought to remain apprised of the rights issue announcement, understand the conditions, and follow a methodical approach. If you are wondering how to apply for a rights issue, you need to follow the directions in the offer and submit a subscription form along with payment. Those who move quickly and make well-informed judgements stand to gain from this investment opportunity.
