#QuickExplainer: Let’s Learn About Rights Issues

moneyguru
3 min readOct 4, 2021

We are telling everything that you need to know about ‘Rights Issue’, with no jargons, of course.

What’s New?

Bharti Airtel’s around ₹21,000 crore rights issue is opening on October 5. The committee has approved September 28 as record date for the purpose of determining the eligible shareholders. The rights entitlement ratio entails one equity share for every 14 shares held by eligible shareholders as on the record date.

We promised that there will be no jargons in this article, but there were so many complicated words in the above paragraph. Worry not, let us help you out here.

Firstly, What Is A Rights Issue?

A rights issue is one way for a cash-strapped company to raise capital. Instead of going to the public, the firm gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings.

Companies also declare a rights entitlement ratio when declaring a rights issue. For example, if a firm declares an entitlement ratio of 1:4, it means that for every four shares that a shareholder already has, they can buy one more share in the rights issue. In Bharti Airtel’s rights issue, for every 14 shares held by the existing shareholder, they will be allowed to purchase one share. The extent to which the shareholders can purchase shares is limited to the shares they already own.

Types Of Right Issues

There are two main types of rights issue of shares.

Renounceable Rights Issue: When Renounceable Rights are provided to a shareholder, they have the option to purchase the shares by exercising their right, or ignore the right, or sell their right at the price that the rights are being traded at in the stock market.

Non-Renounceable Rights Issue: When Non-Renounceable Rights are given to a shareholder, they only have the option to purchase the shares by exercising their right or ignore the right. When these rights are offered, the shareholders cannot sell their right to another investor.

Eligibility

All shareholders who own shares of the company before the ex-date, which is determined by the company, are eligible for the rights issue shares. When announcing a rights issue, the firm also informs the shareholders regarding a record date. It is the cut-off date fixed by the firm.

In India, we follow a T+2 rolling system. This means that the ex-date is 2 days before the record date. If an investor wishes to be eligible for the bonus issue, they must buy shares before the ex-date. Any investor who buys the stock on the ex-date will not be eligible for it.

Let’s take Bharti Airtel’s right issue. The record date is fixed on September 28, so the ex-date will be September 26. So, those shareholders, who own Airtel shares by September 25, will be eligible to buy the rights issue shares.

Applying For A Rights Issue

You can apply for a rights issue either online or offline by using the below methods.

Making an application via ASBA (Applications Supported by Blocked Amount) facility process: Investors must have an ASBA enabled bank account with a Self-Certified Syndicate Banks (SCSB). The application form will be available on the company’s website, BSE, NSE and registrar’s website. If the form is not accessible, investors can apply on plain paper. However, this would restrict investors from renouncing their rights issue.

Making an application via R-WAP (Registrar’s Web-based Application Platform) process: Investors can fill the online application form available on R-WAP. This facility is only available for resident investors. Investors should also have an active internet banking account or UPI facility. The important thing to note is that the payment should not be done using a third-party account while using R-WAP. Application on plain paper is not allowed via the R-WAP facility.

To Note

Investors are not obligated to buy shares through the rights issue. Even if they choose to buy the shares, they should note that rights issue is different from bonus issue as one is paying money to get additional shares. Hence, investors should only subscribe to it if they are completely sure of the company’s performance. Also, investors shouldn’t subscribe to the issue, if the share price has declined below the subscription price, as it may be cheaper to buy the shares in the open market, writes, The Economic Times.

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