Many times when companies want to raise capital, they often open rights issues, where existing shareholders get a chance to buy more shares of the firm at a discounted rate.
The number of shares of a firm you can buy in a rights issue depends on the number of shares you already hold and the proportion at which the firm is allotting these shares. The number of shares a shareholder is entitled to during a rights issue is called Rights Entitlement (RE)
It is basically the number of new shares an existing shareholder is eligible to apply for under the rights offer. Rights entitlement of shares is a relatively new concept in the Indian stock markets, introduced in May last year during the Reliance Industries ₹53,125 crore rights issue.
In the case of the RIL rights issue, suppose a shareholder held 150 shares, then he/she was eligible for 10 new shares in the rights issue. The 10 shares are hence the rights entitlement of the shareholder.
Rights entitlement is the right to shares given by the firm launching a rights issue to its shareholders. These existing shareholders have a right to subscribe to the issue and sell to other willing investors.
Why should you opt for RE?
Under RE, the shares are credited directly to your Demat account and save you the hassle of submission of physical forms. Earlier the completion of the whole process of rights issue used to take around 60 days. Now with this new streamlined approach, the entire process could be completed in just 30 days.
In RE, the entitled shares are transferred directly to the shareholder’s Demat account even before the issue opens. This is done by the RTA (registrar and transfer agent) of the issuer, who has the Demat account details.
Now the investor has 2 options, you can either apply for the issue or sell the rights in the markets like shares. One can now trade REs like shares. Even if you are not an existing shareholder, you can buy REs from one who does not want to apply for the rights issue in the secondary market.
For example, when Airtel came out with its rights issue. Suppose as an existing shareholder you get 10 rights shares. Now, these shares will appear in your Demat account even before the issue opens. You can now apply for these 10 shares and pay the issue price or sell these 10 shares to investors in the secondary market.
This process gives shareholders the opportunity to gain from the rights issue even if he/she does not want to apply. Earlier, if an investor was not interested in applying for the rights issue, the shares would lapse but now he/she has the opportunity to sell the RE and make some profit.
The REs can trade online on stock exchanges like equity shares. The trading of RE will usually close three working days before the rights issue opens to ensure that shareholders and the renouncee have enough time to submit the forms.
Frequently asked questions
How do you trade in RE?
One can trade in RE on the NSE Equity market trading platform.
What happens if REs are neither subscribed nor renounced?
REs which are neither subscribed nor renounced on or before the Issue Closing Date has lapsed post-closure of the issue.
Can an investor who is not an existing shareholder apply for a rights issue?
Yes. If they purchased RE from an existing shareholder, then they can subscribe to the Rights issue before the close of the issue.