What is Rights Entitlement?
Publicly listed companies can raise additional capital from existing shareholders by offering rights issues. The rights offer is the right provided to existing shareholders to buy additional shares called rights shares, often at a discounted price compared to the current market price.
Take an example, if a company issues rights shares in the ratio of 1:10 means1 rights share is offered for every 10 shares owned by the investor. Suppose an investor has 100 shares, which means he will receive 10 shares as rights entitlement. RE are temporary shares and shareholders can use rights entitlement to purchase rights shares,renounce them on the exchange, or just let them lapse.
How to Apply for Rights Shares Online?
Credit of Rights Entitlements to Existing Shareholders
The registrar and transfer agent (RTA) who have the demat details of all shareholders transfer RE even before the issue opening date. Thus, eligible shareholders can see REs in their portfolio holdings. For example, if a company announces a rights issue of shares in proportion to 1:5 means an investor will be entitled to receive 1 RE for every 5 shares. You can take any of the following actions:
Use Rights Entitlement to participate in the rights offer or subscribe to more shares of the company, at discounted rates.
Renounce (sell) the REs on the stock exchange before the date of issue closing.
Do nothing neither apply for rights issues nor sell them.
Credits of Rights Entitlement to Non-shareholders
Non-shareholders can also participate in rights issues by buying RE from the secondary market. Anyone who wants to apply for rights shares but is not an existing investor, has an option to buy rights entitlements, when available on the stock exchange for renunciation.
Also, if an investor is eligible to apply for 4 rights shares, what if he wants to subscribe to more rights shares say 7 rights shares? In such case, shareholders can buy 3 REs from the exchange and then will be eligible to subscribe to 7 rights shares. Take another scenario, in the above example, if a shareholder has 3 shares by record date, he cannot participate in the rights offer, but he can buy REs to be eligible.
Renunciation of Rights Entitlement
Renunciation is the process of transferring or selling rights entitlement to another person. As said, rights shares are only offered to eligible shareholders who have the company’s shares by the record date. However, the problem is not all eligible investors want to apply for rights shares even at discounted rates, while other individuals who do not owe the company’s shares may be interested in the rights offer. Rights entitlement renunciation is the solution to it. Let’s understand how:
For an investor who receives 10 shares as REs but is not interested in purchasing rights shares, what he can do is he can sell or renounce them to the person who wants to participate in the rights offer. This way, an existing investor can monetize their RE and the buyer of RE will become an eligible investor. Otherwise, if the shareholder acts nothing, the value of RE will be zero after the expiry period. On-market renunciation and off-market renunciation are the two ways to sell rights entitlement.
On-market renunciation: It is the process of selling RE on the stock exchange in the same way as trading in stocks. With the introduction of RE in demat form, on-market renunciations become popular.
Off-market renunciation: REs are transferred through a depository participant in demat mode, the same way as the transfer of equity shares.
Shareholders can renounce RE either partially or completely.
Trading (Buy and Sell) Rights Entitlement
Rights Entitlement are tradable instruments just like stocks. Yes, rights issues are traded on the equity market segment of BSE and NSE. But do not get confused with RE and original equity shares of the company. You can find REs on the exchange with the company name with the “RE” or “RE1” symbol. Rights Entitlement carries a different ISIN code than the actual ISIN code of the company’s shares.
The price of Rights Entitlement is lower than the actual share trading price. Because the RE price is the premium that the buyer will pay to the seller to subscribe to rights shares of the company.
Take an example of a company whose stock price is Rs 20 and the company makes rights offer at Rs 16 per share. Suppose, the company’s rights shares are trading at Rs 6 means to buy 1 RE, the investor will pay Rs 6 and then will use the RE to subscribe to 1 rights share of the company at Rs 16/share. On the first day, the base price for RE is calculated as:
Closing Price of the share – Rights Entitlement price
For subsequent trading days, the RE closing price will be the base price.
Why Rights Entitlement or the importance of RE
The issuance of rights entitlement in demat form is important for the following reasons:
It eliminates the need for physical form submission to buy and/or sell rights entitlement.
Shareholders can trade REs directly on the exchange and transfer their rights.
It streamlined the process of renunciation of rights entitlement.
Transparent disclosure of RE price as investors can check the value of the RE on the exchange.
A 100% upfront margin is required because intraday trades (MIS) are not allowed in rights entitlement.
Lot size will be 1 share i.e., investors can buy and sell 1 rights entitlement.
Rights issues can be traded in the “BE” and “BL” series.
BE series RE are Trade to Trade (T2T or T-segment) stocks that only allow delivery trading; intraday trading is not permitted.
BL series is for Block Deals that are used for bulk orders trading, of a minimum of 5 lakh shares.
Investors can place both market and limit orders for RE.
Timeline for trading in Rights Entitlement
Impact of Rights Entitlement on the stock price
In rights issues, as the company offers additional shares to existing shareholders, the total number of shares will increase. As more shares are available, the ownership stake of each shareholder will decrease, resulting in dilution. Investors who apply for rights shares, fully in proportion to their shareholdings, will have their ownership stake remain unchanged, while for others who do not apply, their stake will decrease.
This ownership dilution causes the stock price to fall. But it is temporary or short-term, and if the company uses the capital raised to support growth, the price will increase over the long term. So, investors should cautiously take action and examine the impact of rights issues on share prices, when exercising their rights.
What happens to Rights Entitlement, if not used?
Any investor who owes the company’s shares by the record date, should either use RE to purchase more shares or if not interested, RE should be transferred or renounced in favor of other people. It is because, if the investor does not tender their REs, they will be lapse.
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