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.
"We have advise our existing shareholder/investors to exercise the rights and 'subscribe' to the issue offered by Reliance Industries (RIL) which is similar to that of investing in a company's future growth and remain invested in the stock for at least two to three years to see the benefit colouring," Prashanth Tapse, AVP Research at Mehta Equities said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q1) What is rights entitlement and why SEBI has introduced it recently again? Is it a real test to the rights entitlement trading platform?
Right entitlement process is new for all market participants and platform will be tested for trading Reliance Industries' rights entitlement (RE) shares introduced by SEBI. The Rights Entitlement platform allows the rights holders to trade their entitlement shares on a trading window on exchanges where holders can sell and renounce their entitlement for a price.
By 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 renouncees have sufficient time to submit the renunciation form and the application form, respectively.
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.
Q2) What are advantages and disadvantages of rights issue?
Right issue of shares is one of the methods to raising capital of the listed companies. When a company needs money to expand and retire some debt on books, it summons the existing shareholders for additional money in exchange for an issue of shares at discounted prices. Thus, such an issue is referred to as right issue. Like a blessing comes along with a risk attached, there are few advantages and disadvantages of right issue like
Advantages1. Fastest method and cheapest source of raising capital
2. Right issue is that it helps promoters to increase their shareholding. The shareholders can subscribe to an ‘unsubscribed portion’ of the issue, which elevates their shareholding.
3. Company also saves a significant amount of money, such as underwriting fees, advertisement cost and so on.
Disadvantages1. Value of each share may get diluted
2. Raising funds through the right issue might create pressure on the company.
3. Stock exchanges put a restriction on the amount on which a company can raise via the right issue.
Q3) What is rights issue and what are types of right issues?
A right issue is a security that is issued by a company to its shareholders on a pre-determined date called the record date.
Types of Rights Issue of Shares
a) 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.
b) 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.
Investors also have the option to decline the offer or sell the rights to another investor. A shareholder may refuse to subscribe to the rights issue and just let the 'right' lapse, in which case the investor gets nothing. Alternatively, he can renounce the shares in favour of another person (called the renouncee) for a price. The process starts when the company despatches a letter to each eligible shareholder informing him that the rights entitlement has been credited into his demat account and the duration of trading of the RE. Shareholders who do not want to exercise their RE can sell it to the renouncees on an electronic trading platform. After the end of the trading period, the registrar and transfer agent will debit the RE from respective demat accounts for lapsed REs.
Q4) What are key things to look at in RIL right issue for an investor?Things investors should know before going to accept the right issue offer:
1.> RIL, Promoters 50 percent stake along with other controlling shareholders have pledged to buy the full extent of their entitlement and also subscribe to all unsold shares in the rights issue which shows the promoters commitment and confidence in the company future growth prospects.
2.> Reason to offer right share to existing shareholder is to pare down the company's debt which over the years has piled up through expansion of its retail and telecom arm and make company a net debt free by this FY2021E.
3.> Right issue fairly priced: As against the last closing price of RIL shares of Rs 1,458.90 on May 15, 2020, the rights issue price of Rs 1,257 apiece is decently attractive, with a discount of 16 percent.
4.> At the ratio of 1:15 right offer and only 25 percent on call, the capital commitment is not very high and it is not mandatory to opt for your right, you can even let your right lapse on the issue.
5.> Existing investor can look this offer as opportunity which gives shareholder to be part of the company's growth prospects in new and emerging domains including retail, telecom and digital avenues.
Q5) Will the trading in rights issue continue till November 2021 or beyond? After getting rights issue shares in June by paying first installment, are they also allowed for trading? Overall how will it pan out and what is the schedule?
Reliance Rights Entitlement (RE): Current RE shares are eligible to trade till May 29, 2020 and then would stop RE trading. Once the RE process gets completed company will re-issue right shares in the respective demat accounts who have fulfilled the obligations till June 3, 2020 with payment of first call i.e. 25 percent on application i.e. Rs 314.25 per rights equity share and soon Rights Equity Shares will be credited to the demat account by June 11, 2020 and on June 12, 2020 it will be again listed for normal trading. Rights equity shares are partly paid up shares and will be allocated a separate ISIN. Hence, it will not trade with the currently listed equity shares of the company. It will trade separately. Also once the right issue shares gets listed on exchange, (Investors cost would be Rs 195 (Assumed) RE price + first call partly payment of Rights which is around Rs 314.24= Rs 509.25 approximately) market expects it would be listed with a decent upside - if the right issue gets fully subscribed as per street expectation.
Once the entire Call Money is raised and the Rights Equity Shares are fully-paid up, the Rights Equity Shares will trade along with the currently listed equity shares of the Company. On payment of the final Call in respect of the partly paid-up rights equity shares, such partly paid-up rights equity shares would be converted into fully paid-up equity shares and shall be listed and identified under the existing ISIN for fully paid-up equity shares of the company.
Q6) Why is the option of Rights Entitlement in Reliance rights issue?
SEBI has allowed Reliance to process and allow investors / shareholders to subscribe to the rights issue to simplify the process during the lockdown period. SEBI also puts its Rights Entitlement' platform to testing environment to introduce and make it compulsory going forward. Despite being a new mechanism, market expects feel RE trading will generate enough interest, given RIL's shareholders an opportunity to yield.
Q7) Why does company go for a rights issue of shares?
Companies opt for the rights issue of shares to raise funds for expansion, launching new products, improving debt to equity ratio, paying off debt or for taking over another company. It is perhaps one of the best ways to raise capital without incurring additional debt because instead of borrowing money from the banks and pay high-interest rates, it is quite a feasible option to raise funds from the existing shareholders.
Q8) Why should one apply for RIL rights issue?
We have advise our existing shareholder/investors to exercise the rights and 'subscribe' to the issue offered by RIL which is similar to that of investing in a company future growth and remain invested in the stock for at least 2-3 years to see the benefit colouring. Availing right just because the offer is at discount to market price is not the only parameter to consider. Investors should also look at factors such as growth prospects and the reason behind the company's decision to come out with a rights issue and so on.
We believe subscribing to the issue makes sense after looking at the recent value unlocking deals like investments by Facebook, Silver Lake, Vista, General Atlantic, KKR and few news reports also say Saudi Arabia's Public Investment Fund (PIF) is also considering to buy a minority stake in Jio in coming days. The Aramco deal investment is also still at the due diligence stage, we believe Aramco deal would also be closed before FY21E thus making it to get debt-free status.
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Disclosure: "Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd."