A rights issue or rights offer is a corporate action in which a company issues additional shares, i.e. rights equity shares, to raise funds. The calculation of right issue shares is simple; right shares are offered to existing shareholders in proportion to the number of shares they own.
The rights issue procedure begins with the issuance of notice of the Board meeting (for passing the resolution for issuing rights equity shares). It ends with the issue of share certificates to eligible shareholders.
Some companies which came up with rights issues in India in July 2022 are Banas Finance Limited, Saboo Sodium Chloro Limited, Maharashtra Corporation Limited, etc. To make the rights issue procedure more efficient and quicker, SEBI introduced dematerialised rights entitlements.
This article talks about rights entitlements in the stock market, how they work, the calculation of the value of rights offering, and whether rights entitlements are good or bad.
What Are Rights Entitlements In The Share Market?
Rights entitlements are the rights issued by the company to its existing shareholders to apply for rights equity shares on the record date.
A record date is a date announced by a company on which the shareholders must possess the company’s shares for participating in the rights issue.
Understanding Rights Entitlements
Rights entitlements, the securities showing eligibility to apply for rights equity shares, are issued in the dematerialised form with a unique ISIN. These rights entitlements are traded on stock exchanges, like stocks, until at least three days before the rights issue, allowing shareholders to gain from their eligibility for the rights issue.
If you want information about rights entitlements issued by a company, you can check the letter of offer that the company has filed with stock exchanges. The same would also be available on the SEBI website.
How Right Entitlement Works?
Here is an example of how rights entitlements work.
Suppose you have 100 shares of ABC company, which announced a rights issue. ABC offered 20 shares, at ₹50 per share, for every 100 shares held by shareholders. Being an existing shareholder, you are eligible for rights entitlement proportional to your current holding.
Suppose the current market value of ABC’s stock is ₹80 per share. Using your rights entitlements, you can apply for 20 shares at ₹50 per share in the rights issue.
The rights entitlements will be credited to your Demat account before the opening date of the issue. You may consider one of the following options:
- You may use your rights entitlements and apply for 20 shares. You may also apply for additional rights entitlements from the secondary market.
- You may also apply for a part of your rights entitlements. For instance, you may apply for 12 shares and renounce others.
- You also have an option to renounce/sell them to other investors via stock exchanges or off-market transfers. Other investors who are not current shareholders but want to buy shares at a discount price in the rights issue may buy rights entitlements from you.
- You may not take any action. If you neither renounce rights entitlements nor subscribe, they would lapse after the rights issue is over.
If you apply, there is no guarantee that you would get all the applied number of rights equity shares, as the allotment would depend on the issue subscription.
Calculating The Value Of A Rights Offering?
Here is the formula to calculate the theoretical value of a rights offering.
The theoretical value of rights = (M – S) / (N + 1)
Where, M – Market price per share
S – Rights issue subscription price per share
N – Number of existing shares required to obtain a right share
Suppose a share of company ABC is traded at ₹100 per share. The stock is offered at a subscription price of ₹70 per share. If nine shares are required to get one right share, here is how you can calculate the theoretical value of a rights offering.
The theoretical value of a right = (M – S)/ (N + 1)
Rights Entitlement: Good Or Bad?
One of the benefits of rights entitlements is that anyone can buy shares from the rights issue from the secondary market, regardless of whether they are current shareholders of the company.
However, if an investor with rights entitlements does not apply for rights equity shares for any reason, he/she would lose the value of rights entitlements.
The introduction of rights entitlements has made the rights issue process quicker and more transparent. If done correctly and timely, investors may gain by using or selling rights entitlements. However, if a non-existing investor buys Rights Entitlements from an existing investor but doesn’t apply for the rights issue, he/she would lose the value of Rights Entitlements.
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If you don’t want to subscribe to your rights entitlement, you can sell them via the rights entitlement trading platform on the stock exchange or without the involvement of the stock exchange, i.e. via an off-market transaction.
The advantages and disadvantages of rights issues are as below.
– One of the advantages of the rights issue is that if you are an existing company shareholder and buy the rights issue, you would have an increased stake in that company at a discounted price.
– However, investors who didn’t apply or didn’t get allotted the right shares might have a decreased proportion of the company. Thus, rights issues can cause equity dilution.
If you don’t apply for the rights issue, the rights for these shares will expire, and once the allocation process is over, the shares temporarily credited to your Demat account will be debited.
Existing shareholders of the issuing company on the record date are eligible for the rights issue.
Usually, right shares are offered at a lower price than their current market price, and the rights prices differ among issuing companies.
A company issues a prospectus before the issue of shares, which gives information about the company, management team, securities offered to the public, and other necessary aspects.