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What is a Rights Issue in the Stock Market?

Being an informed investor can go a long way when it comes to creating wealth. In fact, becoming an informed investor starts with knowing key events that are termed “Corporate Actions” (CAs). 

These actions have the ability to affect the way a company is perceived by investors. If you’ve landed on this blog, then you want to know everything about “Rights Issue”. Lucky for you, that’s what we will help you with!

Rights Issue Meaning

A Rights Issue is a corporate action where a company invites its existing shareholders to apply for additional shares in proportion to their holdings, at a discounted 

A Rights Issue means that eligible shareholders will receive the Rights Entitlement (RE) in their demat account before the Rights Issue opens. 

These REs are not equity shares but are a type of coupon/voucher (referred to as rights entitlements) that can be used to apply for the rights shares. REs can be used to apply for the Rights Issue or can be transferred (renounced) by selling them in the market.

They will lapse and become worthless if you do not use them to apply for the rights or sell them within the prescribed timeline.

Why Does a Company Launch a Rights Issue?

The rights issue is a way by which listed companies raise more capital from existing shareholders. Funds raised are They do so by diluting their equity further. Depending on their need for funds, they may issue fully paid-up shares or partly paid-up shares. 

If the company raises all the funds in one go, it issues fully paid-up shares as the investor has fully paid up for the rights equity shares. However, If the company wishes to raise funds in tranches, it issues partly paid-up shares as the investors are asked to pay in two or more installments.

How to Apply for a Rights Issue?

There are three ways of applying for a rights issue:
1. Online ASBA (Applications Supported by Blocked Amount). If your bank supports it, similar to an online IPO application.
2. Offline (physical ASBA) if your bank does not support online ASBA. For this, you would need to fill out an application form which you would have received from the RTA (Registrar and Transfer Agent) of the company via email/courier/speed post. You will have to fill out the form and submit it at a Self-Certified Syndicate Banks (SCSBs) branch.
3. Online RWAP facility provided by the company RTA.

FAQs

Q. How many shares will I get in the Rights Issue?

An investor will get at least those many rights issue shares as many as Rights Entitlements (REs).

Q. Can Rights Issues be Oversubscribed?

Yes, when many investors apply for shares in the rights issue over and above the number of REs, it maybe is oversubscribed. However, the allotment of additional shares depends on the response to the issue and the decision is finalized by the company.

Q. How do you qualify for Rights Issue?

You qualify for Rights Issue if you have received the REs or purchased REs via trading.

Q. How many REs are You Eligible for?

The Rights Issue is offered in proportion to existing holdings based on which the REs are credited. If the ratio in which the rights share are offered results in fractional rights entitlement, the fraction is ignored and the rights entitlement is credited applying rounding down logic. 

Consider a company announcing to offer 3 rights shares for every 5 shares held:

  • Example 1: If you hold 15 shares of the company as of the record date, you will be eligible to get 9 REs
  • Example 2: If you hold 16 shares of the company as of the record date, you will still be eligible to receive only 9 REs, since the fractional entitlement will be ignored by being rounded down to the nearest integer?

Q. What is renunciation of rights entitlement?

The renunciation of RE is the process of transferring or selling the entitlements to another interested party in part or whole when the shareholder is not willing to subscribe to his rights entitlements.

Q. When are REs credited to the DEMAT account?

REs are generally credited to the DEMAT account before the opening date of the issue. You will receive a notification from CDSL (via email and SMS) when your REs get credited to your DEMAT account.

Q. When can I start trading in REs?

Exchange(s) opens up a window for trading in the REs.

Q. Which segments are REs traded in?

Rights entitlement is traded on the equity market segment.

Q. Whether REs are equity shares?

No, REs are not equity shares. They are a kind of coupon/voucher (referred to as rights entitlements) that can be used to apply for the rights shares.

Q. What are important dates in a rights issue?

Refer to the timeline chart below:

Q. Can I trade on the REs intraday?

No. REs are traded on trade-to-trade settlement (T2T)

Q. How is the base price calculated?

On the first day of the Right Entitlement, the base price will be the closing price of the stock on the previous day of the issue opening date less the offer price in the rights issue.

Q. I missed renouncing my rights during the trading window, is there any way to renounce?

The trading in REs is allowed only for a specific period (referred to as the trading window) on the stock exchange. Once the right entitlement trading is suspended, one can renounce their rights only through off-market renunciation.

It can be done anytime from the issue opening date till the issue closure date. However, it should be done within a reasonable timeframe in such a way that the transfer is completed in such a manner that the REs are credited to the DEMAT account of the buyer on or before the Issue Closing Date.

Q. What is a rights issue where partly paid shares are issued?

A rights issue wherein a company seeks issue price in two or more installments results in the issuance of partly paid shares. Read more about partly paid shares here.

Dhan

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