Right Issue

Companies choose a Rights Issue over other fundraising options like QIP, IPO, or debt financing due to several strategic advantages:

✅ 1️⃣ Protects Existing Shareholder Interests

• Unlike a Qualified Institutional Placement (QIP) or Preferential Allotment, a Rights Issue allows existing shareholders to maintain their ownership percentage, avoiding dilution from external investors.

✅ 2️⃣ Cost-Effective Fundraising

• A Rights Issue is cheaper than an IPO since it involves fewer regulatory approvals and marketing expenses.
• No need to pay high underwriting and listing fees compared to public offerings.

✅ 3️⃣ No Increase in Debt Burden

• Unlike bank loans or bonds, a Rights Issue does not create interest obligations or increase financial leverage.
• This helps in debt reduction if funds are used to repay loans.

✅ 4️⃣ Faster Capital Raising Process

• Compared to an Initial Public Offering (IPO), a Rights Issue is quicker since it is offered only to existing shareholders, requiring fewer compliance steps.

✅ 5️⃣ Market Perception & Confidence Boost

• A Rights Issue signals that promoters are confident in the company, especially if they subscribe to their entitlement.
• Investors see it as a positive sign if the proceeds are used for expansion, acquisitions, or working capital.

✅ 6️⃣ Flexibility for Shareholders

• Existing shareholders can choose to:
  🔹 Subscribe fully or partially
  🔹 Sell their Rights Entitlement (RE) in the open market (if renounceable)
  🔹 Ignore the offer if they don’t wish to invest further

A Rights Issue is primarily offered to existing shareholders of the company. However, participation depends on specific eligibility criteria:

✅ 1️⃣ Existing Shareholders (as of the Record Date)

• Only shareholders holding shares on the record date are eligible to receive the Rights Entitlement (RE).
• The record date is set by the company to determine who qualifies for the Rights Issue.

✅ 2️⃣ Renouncee (If the Rights Are Renounceable)

• If the Rights Issue is renounceable, eligible shareholders can sell their Rights Entitlement (RE) in the open market on stock exchanges.
• Any investor (including those who were not original shareholders) can buy these entitlements and apply for the issue.

✅ 3️⃣ Promoters & Institutional Investors

• Promoters often participate to maintain or increase their stake.
• Mutual funds, foreign portfolio investors (FPIs), insurance companies, and banks can also subscribe to rights shares by purchasing entitlements.

❌ Who Cannot Participate?

• New investors who do not hold shares on the record date (unless they buy Rights Entitlements in the secondary market).
• Retail investors who do not act on their entitlements before the application deadline.

The issue price in a Rights Issue is typically set at a discount to the current market price to encourage participation. Companies consider several factors when determining this price:

✅ 1️⃣ Discount to Market Price

• The issue price is usually lower than the prevailing stock price to make it attractive for existing shareholders.
• The discount percentage varies based on market conditions, investor sentiment, and company needs.

✅ 2️⃣ Company’s Financial Requirements

• The company sets the price based on the amount of capital it needs to raise while balancing dilution concerns.

✅ 3️⃣ Valuation Metrics & Market Conditions

• The company may use valuation methods such as:
  🔹 Price-to-Earnings (P/E) ratio
  🔹 Price-to-Book (P/B) ratio
  🔹 Historical stock performance
• A deep discount may indicate urgent fundraising needs, while a smaller discount may signal financial stability.

✅ 4️⃣ SEBI Regulations (For Listed Companies in India)

• While SEBI does not mandate a fixed discount, companies must justify the pricing in their offer document.

The Rights Issue ratio determines how many new shares an existing shareholder is entitled to buy. It is expressed as:

(X:Y) → X new shares for every Y shares held

✅ 1️⃣ Understanding the Ratio

• Example 1: 1:5 Rights Issue → A shareholder gets 1 new share for every 5 shares held.
• Example 2: 3:10 Rights Issue → A shareholder gets 3 new shares for every 10 shares held.

✅ 2️⃣ How to Calculate Entitlement?

🔹 Formula:
(Number of shares held / Y) × X

🔹 Example:
If an investor holds 500 shares, and the Rights Issue is 2:5, their entitlement is:
(500 ÷ 5) × 2 = 200 new shares

✅ 3️⃣ Key Points About Rights Ratio

• It ensures proportional allocation to all eligible shareholders.
• The ratio is decided based on capital needs and dilution impact.
• Shareholders can subscribe fully, partially, or renounce (sell) their entitlement.

If an eligible shareholder chooses not to subscribe to the Rights Issue, the following scenarios may occur:

✅ 1️⃣ Shareholding Gets Diluted

• If the shareholder does not subscribe, their ownership percentage in the company reduces as new shares are allotted to others.
• This happens because the total number of shares increases, but their holding remains the same.

✅ 2️⃣ Selling Rights Entitlement (If Renounceable)

• If the Rights Issue is renounceable, shareholders can sell their Rights Entitlement (RE) in the stock market before the issue closes.
• This allows them to earn money from the rights instead of letting them lapse.

✅ 3️⃣ Unsubscribed Shares May Be Allotted to Others

• Promoters or institutional investors may subscribe to the remaining shares.
• In some cases, the company may withdraw or modify the Rights Issue if there is low subscription.

Example Scenario

If a shareholder holds 1,000 shares and the Rights Issue is 1:5, they are eligible for 200 new shares.

• If they subscribe → They maintain their percentage holding.
• If they ignore → Their stake gets diluted, and other investors take the new shares.
• If they sell RE (if allowed) → They receive money for their entitlement without subscribing.

A Rights Issue affects stock price and shareholder value in multiple ways, both in the short term and long term.

1️⃣ Immediate Impact on Stock Price (Ex-Rights Adjustment)

Since new shares are issued at a discount, the stock price usually drops after the record date. The price adjusts based on the new weighted average price of all outstanding shares.

Example:
If a stock is trading at ₹500 and the Rights Issue is at ₹400 in a 1:5 ratio, the adjusted price will be lower than ₹500 after the issue.

2️⃣ Impact on Shareholder Value

• Short-term dilution: Existing shareholders may see a temporary decline in the stock price.
• Long-term gain: If the company uses funds effectively (e.g., expansion, debt reduction), shareholder value can increase over time.
• Subscription vs. Non-subscription:
  • If a shareholder subscribes, their percentage ownership remains stable.
  • If they don’t subscribe, their stake gets diluted, as new shares increase total outstanding shares.

3️⃣ Market Sentiment & Volatility

If investors believe the company is raising funds for growth, the stock price may recover or rise after initial adjustment. If the issue is seen as a sign of financial stress, the price may decline further due to negative sentiment.

A Rights Issue can be classified into two types based on whether shareholders can sell their entitlements:

1️⃣ Renounceable Rights Issue

• Shareholders can sell their Rights Entitlement (RE) in the stock market if they do not want to subscribe.
• Investors who are not existing shareholders can buy these entitlements and apply for the rights shares.
• This allows shareholders to monetize their rights instead of letting them lapse.
• Common in large, publicly traded companies.

Example: If a shareholder is entitled to 100 rights shares but does not wish to subscribe, they can sell their RE in the stock market, earning money from the entitlement.

2️⃣ Non-Renounceable Rights Issue

• Shareholders cannot transfer or sell their Rights Entitlement.
• They must either subscribe or let the entitlement lapse.
• Common in smaller companies or when the company wants to raise capital only from existing shareholders.

Example: If a shareholder is eligible for 100 rights shares but does not subscribe, they simply lose the opportunity, and the entitlement expires.

The Securities and Exchange Board of India (SEBI) has set regulations to ensure transparency, fairness, and investor protection in the Rights Issue process. The key guidelines include:

1️⃣ Eligibility Criteria

• The company must be listed on a recognized stock exchange.
• It must comply with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
• The promoters must not be wilful defaulters or fraudulent borrowers.

2️⃣ Offer Document & Disclosures

• Companies must file a Letter of Offer (LoF) with SEBI for Rights Issues exceeding ₹50 crore.
• The LoF should disclose fund utilization, risk factors, financial statements, and business details.
• For issues below ₹50 crore, only stock exchange intimation is required.

3️⃣ Pricing Regulations

• The issue price is decided by the company, but SEBI ensures that pricing is transparent.
• Shareholders must be informed of the discount (if any) and rationale.

4️⃣ Rights Entitlement (RE) Trading Rules

• SEBI allows trading of Rights Entitlements (REs) on stock exchanges in case of a renounceable issue.
• The REs are traded for a specific period before the issue closes.

5️⃣ Timeline & Subscription Period

• The subscription period must be at least 15 days and not more than 30 days.
• The company must provide clear communication on the record date, opening, and closing dates.

6️⃣ Allotment & Refund Process

• Shares must be allotted within 15 days from issue closure.
• If the issue fails or there is oversubscription, refunds must be processed within 10 days.

7️⃣ Minimum Subscription Requirement

• The issue must receive at least 90% subscription.
• If the minimum subscription is not met, the company must refund the money to investors.

Timeline for a Rights Issue – From Announcement to Allotment

The Rights Issue process follows a structured timeline as per SEBI regulations. Here’s a step-by-step breakdown:

1️⃣ Board Approval & Announcement (Day 0-5)

• The company’s Board of Directors approves the Rights Issue.
• A public announcement is made through stock exchanges and media.

2️⃣ Record Date Declaration (Day 5-10)

• The company announces the Record Date, which determines eligible shareholders.

3️⃣ Filing of Offer Document (Day 10-15)

• If the issue size is above ₹50 crore, the company files the Letter of Offer (LoF) with SEBI.
• SEBI reviews and provides observations (if any).

4️⃣ Rights Entitlement (RE) Trading Period (Day 15-20)

• If renounceable, Rights Entitlements (REs) start trading on stock exchanges for a limited period.

5️⃣ Opening of Subscription (Day 20-25)

• Shareholders can subscribe to the Rights Issue by applying for shares.
• The subscription period must remain open for at least 15 days and up to 30 days.

6️⃣ Closing of Subscription (Day 35-45)

• The issue closes, and no further applications are accepted.

7️⃣ Allotment of Shares (Day 45-50)

• The company finalizes allotment based on applications received.
• If oversubscribed, excess applications may be refunded.
• If undersubscribed, promoters or other investors may subscribe to remaining shares.

8️⃣ Credit of Shares & Listing (Day 50-55)

• Shares are credited to shareholders' demat accounts.
• The newly issued shares are listed on the stock exchange, and trading begins.