Concept of Right Issue

Concept of Right Issue

What is a Rights issue?
A rights issue is an offering of rights to the existing shareholders of a company that gives them an opportunity to buy additional shares of the company directly from the company at a discounted price.Shareholders having the shares in the demat a/c on the record date will receive Right Entitlements (REs) in their demat accounts, which they can use to apply for the right shares or sell in the market. If not used or sold, REs expire and become worthless.

For example:
If you own 100 shares of ABC ltd. and ABC ltd. issues right shares in the ration of 1:5, then you can either buy 20 more shares at a discounted price using the REs you receive or sell those REs.

What different methods are there for applying to a rights issue?

  • To apply for a rights issue, shareholders can use the Applications Supported by Blocked Amount (ASBA) process similar to applying for an IPO if their bank supports it. 
  • Alternatively, the company's Registrar and Transfer Agent (RTA) will send a Composite Application Form (CAF) via courier to those who cannot apply online. The filled form can be submitted at a Self-Certified Syndicate Bank (SCSB) branch(WEB)The forms can also be downloaded from the BSE and NSE websites by visiting bseindia.com/publicissue.html and nseindia.com/market-data/all-upcoming-issues-ipo.
  • The rights issue details, such as the Rights Issue ratio and the Book closure date, will be mentioned in the application form.
  • The application form requires the following details to be filled in:
    1. Cheque /DD details (non - ASBA).
    2. Select NSDL if the DP starts with IN.Select CDSL if the DPID is completely numeric.
    3. If the account is a joint account, the PAN of the second holder should also be filled in.
    4. Provide DP details. (DP ID and the beneficiary number ).
    5. Signatures of both account holders is required if it is a joint account.
  • Once the form is filled, it can be submitted to any SCSB branch. The list of banks can be found on the application form. 

How can shareholders get the application form for the Rights issue?

  • From Issuer : - The issuer shall dispatch a common application form to its shareholders as on the record date. The issuer shall also send the details of the rights entitlements of the shareholder separately. This application form can be used both by shareholders or renouncee.
  • From the Registrar to Issue:- The registrar to the issue shall also upload the application forms on its website.
  • In terms of Regulation 78 of the ICDR Regulations, the investor also has the option to make an application in writing on plain paper.

    Applicants can use the application form available on the website of the registrar to the issue or printed forms sourced from the issuer or merchant bankers.

Where can I apply for the rights issue?
The RTA will put up the exact link on their website once the issue is live. The same goes for the banks which will support the issue.

What happens to the Rights Entitlements (REs) in the form of temporary demat securities if they are not renounced or exercised before the trading window closes?
The REs will lapse, and the holder will lose the premium paid to acquire them.

Can applicants who are not existing shareholders of the issuer company as of the record date/ex-date apply for the rights issue?
Yes, by purchasing the REs, a person who is not an existing shareholder of the issuer company can apply for the rights issue.