Explainer | What is a Rights Entitlement? And How to participate in it?

"This is a real test to the Rights Entitlement trading platform as the response from the same would be monitored and examined by SEBI. Intraday trading is not allowed in this particular platform. Only shareholders who are interested in the Rights issue are advised to participate here and existing shareholders who receive entitlement in the Rights issue are allowed to sell," Manali Bhatia, Senior Research Analyst at Rudra Shares and Stock Brokers said.

This process and platform gives shareholders an opportunity to gain some value of eligible RE shares. Until now, shareholders, who didn't wish to apply, had to let their RE lapse or had to transfer it for free. By introducing this platform shareholders can see value of right shares intrinsic value.

The REs are allowed to trade online and on stock exchanges, similar to equity shares. The trading of such RE will close at least three working days before the rights issue to ensure that shareholders and the renouncee have sufficient time to submit the renunciation form and the application form, respectively.

Reliance Industries RE closed at Rs 233.6 on the National Stock Exchange May 21, up 15.6 percent.

In the case of Reliance, trading for RE shares will close on May 29, so that as per T+2 schedule eligible shareholders should be finalised by June 2 and the first installment payment should be done by June 3.

"SEBI introduced this platform to reduce the timelines of such right issues and simplifies the process of Rights Issue and also provide clarity on the renunciation and trading of rights entitlements. These steps are welcomed and will potentially make rights issues a preferred option to raise capital for listed companies and also benefiting shareholders," said Prashanth Tapse, AVP Research at Mehta Equities told Moneycontrol.

What is Rights Issue?

A right issue is a security that is issued by a company to its existing shareholders on a pre-determined date called the record date or Rights issue refers to buying of shares by the existing shareholders at a discounted price on a particular ratio.

In case of Reliance Industries, after finalising the eligibility, partly paid up Rights shares will be allotted and credited to eligible shareholders by June 11 and same shares will be listed on bourses on June 12. Partly paid up is because investor will be paying only first installment while the second (Rs 314.25) and third/final installment (Rs 628.50) will be paid by investor in May 2021 and November 2021 respectively.

Two Types of Rights Issues:

Renounceable Rights Issue: Here, an existing shareholder of the company has the right to transfer his/her right to subscribe rights issue of shares to anyone who may not be even shareholder of the company.

Non-Renounceable Rights Issue: The existing shareholders do not have the right to transfer his/her right to subscribe rights issue of shares to anyone. Here, the shareholder only has two options available, either to skip or purchase the shares.

Advantages and Disadvantages of Rights Issue

Advantages:

>> It is the fastest method & cheapest source of raising capital for a company.

>> Rights issue helps promoters to increase their shareholding. The shareholders can subscribe to an 'unsubscribed portion' of the issue, which elevates their shareholding.

>> Company also saves a significant amount of money, such as underwriting fees, advertisement cost and so on, i.e. company does not have to incur additional expenses for raising fresh equity.

>> The major advantage of the right issue is - the existing shareholder of the company has right to receive shares on a particular ratio set by the company. In case of Reliance Industries, the entitlement ratio is 1:15, one rights equity share for every 15 equity shares held by existing shareholders) at a discount to the current market price.

Disadvantages:

> Value of each share may get diluted.

> Raising funds through the right issue might create pressure on the company.

> Stock exchanges put a restriction on the amount on which a company can raise via the right issue.

> If the share price decreases post rights issue then investor's may loose the holding value.

Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.