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Right Issue of Shares- Meaning and Detailed Overview

 

Right Issue of Shares- Meaning and Detailed Overview

A Rights issue is a group of rights that are offered only to the existing shareholders. It serves an invitation to the existing shareholders to purchase more stock shares in proportion with their existing holdings. It is an option type that gives a company’s stock holders the right, but not the obligation to purchase the additional shares in the company.
At the rights issuance, the subscription price on which each share must be purchased is generally discounted relative to the current market price. The Rights are mostly transferable, allows the holder to sold them in the open market.

Meaning- In detail
A right issue is simply a market that offers the existing shareholders to buy the additional shares of the company on the basis of pro-rata within the specified date and at a discounted price than the current market price. It is important to notice that right issue provides an invitation that provides an opportunity for the existing shareholders to increase their shareholding. It is a right that a shareholder may or may not select to exercise and is not obliged to buy the shares further.


Who is Eligible for Rights Issue?
Unlike the Initial Public Offering (IPO), Right issues are not meant for the general public. It is meant specially for the existing share holders of the company. In the rights issue, a company holds the shares of the company on the record date in order to be eligible for the right issue. The shares become the ex-rights one day before the record date.
In case any individual buys the shares on or after the ex-date then the customer won’t be considered as eligible to receive the right entitlements as they would not qualify as an existing shareholder of the company on the record date.
Now, after knowing the eligibility criteria for holding a Right Issue. Before that, we must know what is the need of Right Issues.

What is the need of Right Issue?
A company issue the rights in order to share the additional capital. Some reasons for the company to prefer the rights issue over public offerings are:
1. The Right issue helps in reducing the debt-equity ratio of the company.
2. The companies which are cash strapped needs capital and do not wish to increase the debt burden by taking any loans offers Right Issue.
3. The companies do this for company expansion, acquisition, takeovers or other general corporate purposes.


Rights Entitlements
The company offering rights issue and further credits the rights entitlement to the eligible shareholders in proportion to their existing holdings.
Rights Entitlements are the temporary credit of the shares that is provided in the eligible shareholder’s demat account. The shareholder is then allowed to apply or trade to the specific number of shares. Crediting the RE in demat account does not oblige a shareholder to compulsorily buy the rights.


Right Issue Options
A Right Issue serves as an offer or invitation for the shareholders with the aim to increase the shareholder of the company that can be accepted or rejected. The shareholder has the right to choose from the following options shown below:
1. An individual can exercise the right in the full and then apply it for the accurate rights share.
2. The shareholder can exercise the right completely and then further apply for the eligible rights along with the additional rights share.
3. The customer can choose to ignore the RE completely and the let the rights lapse. There is no action needed in this case.
4. The shareholder can exercise the partial rights and let the remaining rights lapse.
5. The shareholder can transfer the remaining rights to other interested investors. It is the process of transfer or sale of RE known as Renunciation of Rights.
6. The shareholders can also choose to transfer or sell the entire RE to the various other investors.


Rights Issue Procedurev
As per the new guidelines provided by SEBI, the tenure of right issue completion process is reduced to 31 days to streamline the rights issue process and introduce the dematerialization of RE.

What are the steps of Rights Issue Process?
1. Upload the application forms by the issuer, registrar or the exchanges on the website.
2. The credit of RE in the demat account for the eligible shareholders.
3. All the interested investors/renounces to submit the application form to apply for the rights issue.
4. The allotment and credit of the right issue shares in the demat account are the post reconciliation of RE Demat account that holds the list and applications received.

Conclusion
The rights issues are gaining more popularity recently with the SEBI streamlining the procedure of the right issues and many companies looking to choose issue rights nowadays to raise the additional capital. The investors further should not get attracted just by the discounts offered by the company but they must also have knowledge of the company’s performance and the reason on why the company will issue the rights just before subscribing it to the issue.

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