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All you wanted to know about rights entitlement

Bavadharini KS | Updated on May 26, 2020 Published on May 26, 2020

There is a lot of buzz around the Reliance Industries rights issue. While this is not the first company to raise capital through a rights offer, it has been the first to credit the rights entitlement of its shareholders directly to their demat accounts so they can trade them on the exchange platform.

With the lockdown still effective in most parts of the country, this electronic credit comes in handy for shareholders who may not be able to step outside to submit physical application forms. SEBI, in a recent circular, has made buying and selling of Rights Entitlements (REs) easy and simple. It could become a preferred mode of raising capital for other companies as well.

What is it?

When companies seek to raise more equity capital, they often give their existing shareholders a chance to participate in such offers through a rights offer. Rights offers are often priced at a discount to the market and allotment is assured. Rights Entitlement (RE) is the number of new shares that the shareholder of a company is eligible to apply for under the rights offer.

REs are usually based on a ratio of existing shares held. Consider the case of Reliance Industries. As on May 14 2020, if you held 150 RIL shares, you are entitled to apply for 10 rights shares which is your RE.

Typically, the entire rights process of a company used to take 55-58 days to complete from the date of issue to listing. But with restrictions in place, the processing of physical rights forms may be difficult for issuers and their agents. Therefore, SEBI has streamlined the steps for rights issues, making them electronic, and reducing the timeline for various procedures, effectively bringing it down to 31 days.

Rights Entitlements, under the new process, are directly credit of to the demat accounts of shareholders even before the issue opens. This is done by the RTA (registrar and transfer agent) of the issuer, who has the demat account details of the company’s shareholders.

Why is it important?

Direct credit of REs into shareholder accounts allows easy trading. Shareholders who don’t want to subscribe can sell their entitlement to those who are keen, for the traded price. REs are traded on stock exchanges, similar to equity shares. In order to differentiate between the two, each company’s RE is allotted a unique security identification number or ISIN. For instance, Reliance Industries RE’s ISIN is INE002A20018 (NSE symbol RIL-RE).

If you want to subscribe to rights over and above your entitlements, normally, you would have to wait for the company to allot shares. Now, with REs traded in the stock market, you can buy more of these entitlements.

Right Entitlement platform not only reduces the timeline of rights issue but brings transparency into the entire process of renunciation of rights.

Why should I care?

The introduction of RE trading allows retail investors to more easily participate in rights offers. They get to purchase additional rights shares, sell or renounce their shares in the stock exchange directly. REs credited to demat account can be renounced either by sale of REs using the exchange platforms or off-market transfers. Note that, if you sell on the exchange, REs are compulsorily delivered (T+2 days) and intra-day trading in RE is not possible. Off-market transfer will be settled by transferring dematerialised REs through the depository mechanism. However, REs trading on the exchange could also lead to higher volatility in their pricing which may not be beneficial for the investors looking to renounce rights.

Bottomline

The process is easier but the risk is your own!

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Published on May 26, 2020
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