To raise capital, companies, at times, announce ‘rights issues’ for their existing shareholders. By means of rights issue, the existing shareholders of a company are offered additional shares in the ratio of their existing equity. This is known as Rights entitlement (RE).
Rights Entitlement enables the shareholder to buy the shares that he/she has been entitled to. They are issued in dematerialised form (in one’s DEMAT account) under a separate International Securities Identification Number (ISIN) code before the rights issue opens.
How does it work?
The eligible shareholder can also apply for additional shares besides the one they have been entitled to but there is no guarantee that the share would be issued to him/her. The subscription price for which the shareholders can purchase the shares is discounted aid lower than the market price.
Shareholders who do not wish to apply for additional shares can disregard the RE that they received in their demat account till the closing date and the said shares will be rendered invalid. On the other hand, shareholders can also sell (renounce) their RE to other interested parties by trading RE.
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A shareholder can either renounce his entitlement either in full or in part. RE trading happens just like any other share except the fact that intraday trading for RE is not possible.
RE trading starts with the issue opening date and closes three working days before the closing date. This window allows the buyers of RE sufficient time to make a decision and submit their application form.
Rights Entitlement is a great opportunity for shareholders to earn profits. Even if the shareholder doesn’t want to buy the shares himself, he can gain by renouncing their RE and trading with an interested party.
