All you need to know about Rights Entitlements4 min read
When you own shares of a company and it announces a rights issue, it means that you will get the right to buy the fresh shares issued by the company.
If the rights are issued in the ratio 1:2, it means that you will have the right to buy 1 share issued for every 2 shares you already hold. Let’s say you own 200 shares, then you can apply for 100 rights shares in this issue at a price set by the company.
Let’s take a fairly recent example of a rights issue. Vidli Restaurants announced its rights issue in the ratio of 3:2 at an issue price of Rs 10 per share. Some of the key dates and details for the issue are as follows:
|Issue Period||Bid/Offer Open and Close dates||Feb 2, 2022 to Feb 16, 2022|
|Record Date||Date on which the list of eligible shareholders is determined||Jan 21, 2022|
|Renunciation of Rights Entitlement||Last date to renounce the eligibility of applying to the rights issue||Feb 10, 2022|
|Payment Terms||Whether payment is to be made in full or in parts||Partly paid-up. Rs. 5 at the time of applying and rest Rs. 5 in one or more installments as per issuer|
This issue was a partly paid-up rights issue, where the issuer company has requested the payment in installments.
The other type of issue is fully paid-up, where you, as a shareholder, pay only once. You will have no recurring obligation to the company, and the company cannot ask you to pay for the same right issue again.
What are Rights Entitlements?
If you hold the shares of the company issuing rights shares on the record date, you will be eligible for applying to rights issue. You will be getting temporary securities called Rights Entitlements (REs) in your demat account to apply for the rights issue.
REs are offered to shareholders in demat account as a ratio to the number of securities held on this record date. With dematerialised Rights Entitlements, there is no need to submit physical forms to apply for rights, making the process more efficient.
Do note that the REs in themselves do not mean you hold the rights shares, rather it means that you are eligible and can apply for the rights shares using the REs before issue closing date.
How can Rights Entitlements be used?
Here’s what a shareholder eligible for REs can do:
i) Use the REs to apply for the rights issue within the Issue Period or
ii) Sell the REs to someone else who might want to apply for the rights issue before the Renunciation of Rights Entitlement date or
iii) Do nothing. The shareholder can let the REs lapse by not subscribing.
If you are not a shareholder of a company declaring a rights issue and want to apply for it, you will have to buy the rights entitlements and then subscribe to the issue.
In case you are eligible for REs or buy REs from the market and then decide to do nothing, your REs will lapse and you will lose any premium paid to acquire them. Once lapsed, the REs will be removed from your holdings after the allocation process is complete.
Trading and Settlement of Rights Entitlements
REs are listed on the stock exchange on the day the rights issue opens. They can be traded over the exchange similar to other stocks before the Renunciation of Rights Entitlement date, which is usually 3-4 days prior to Issue Close date.
The Rights Entitlements price on the first trading day is based on the difference of the equity stock and the price at which rights share is issued. Following that, market forces will determine the price of these RE stocks.
It has a unique ISIN to differentiate from the actual company stock and its symbol is declared by the exchanges pre trading date. REs are cleared and settled on a trade for trade basis meaning intraday trades are not allowed. For more information on the REs during a Rights Issue, you may refer to the SEBI FAQs, BSE or NSE websites.
Things to keep in mind
– REs are temporary demat securities that allow shareholders to subscribe to rights issues.
– REs are offered to shareholders in the ratio of the holdings at record date.
– REs in themselves do not mean one holds rights shares. One needs to use them to apply for rights shares.
– Shareholders can either subscribe to the issue at the issue price using the REs or trade them over the exchange for a price before issue closing date.
– REs will lapse if one does not apply for the rights shares and the REs will be removed from the demat account.
Disclaimer: Investment in the securities markets are subject to market risks, read all the related documents carefully before investing. This content is purely for informational purposes and in no way an advice or recommendation. Paytm Money Ltd SEBI Reg No. Broking – INZ000240532. NSE (90165), BSE(6707) Regd Office: 136, 1st Floor, Devika Tower, Nehru Place, Delhi – 10019.