Rights Entitlement of shares is a relatively new entrant in the stock market. Last year, SEBI, the market regulator, made buying and selling of Rights Entitlements (REs) easy and simple through electronic credit. If not for this, shareholders had to submit physical application forms to apply for Rights Issues.
The online credit of REs came at a time when most parts of the country were in lockdown, making the entire process seamless. Many companies raise capital via rights, the recent one to do is Bharti Airtel.
So, if you are one such investor looking to know more about Rights Entitlement, here is a basic guide.
What is Rights Entitlement?
A listed company, when it plans to raise additional capital, often considers doing it from their existing shareholders, through rights issues. A rights issue gives existing shareholders the right to buy new shares in proportion to their existing shareholding. Often, rights issues are priced at a discount to market price. And allotment is assured as it is only available for existing shareholders.
Rights issue means the number of new shares that is available for eligible shareholders for subscription. Now, Rights Entitlement means the same, only the credit is given in the Demat account of those eligible shareholders. REs are based on a ratio of existing shares held. For instance, in the case of Bharti Airtel, the ratio is one share (rights issue) for every 14 equity shares held. So, which means, as of September 28, 2021, if you held 28 Bharti Airtel shares, you are entitled to apply for two rights shares. This will be your RE.
Why Rights Entitlement?
On one side, the introduction of RE discards the need for submission of physical forms, and on the other, the entire process of the rights issue is streamlined in terms of timeline.
That is, before RE, the entire process of a company coming up with rights issues up to the date of listing used to take up 55-58 days. Now, this timeline has come down to nearly 31 days.
Under RE, the rights shares are credited directly to the Demat account of eligible 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.
The eligible shareholders have two options. They can either apply for the rights or sell their rights in the market just like any other shares. (Read more to know how to apply for rights issue)
One of the key benefits of RE is that anyone can buy the rights (shares) of a company from the secondary market. Suppose you are a shareholder of Airtel, holding 10 shares. Then you are not eligible for the right issue. In such a case, you can buy the right from the secondary market. This not only gives the opportunity to subscribe for the rights of Airtel but also allows you to buy the stock at a lower price.
How does it work?
Let us understand with Bharti Airtel’s rights example.
Bharti Airtel has come out with rights issues to repay its liabilities and general corporate purposes.
Suppose you are an investor who owns 140 shares of Bharti Airtel, then your rights entitlement is in proportion to your existing holding. So, in this case, you will get 10 shares as RE. The issue is priced at Rs 535 per share while the current market price of Bharti Airtel is around Rs 535. Subscribers will have to pay 25 per cent of the money at the time of application. Airtel will call for the balance of 75% in two different tranches.
Rights Entitlement is a temporary credit of shares of Bharti Airtel in your Demat account. You as an investor can either subscribe to the rights or sell it in the secondary market. Airtel’s RE is currently trading at Rs 210.
What happens if you don’t apply?
If you are not exercising your RE, it expires. As per the SEBI mandate, if you neither subscribe (apply) for or sell in the secondary market, these rights (shares) will be extinguished after the closing date.
Rights in tranches
When it comes to rights issues, it can be of two types. One is fully paid-up shares where you, as a shareholder, pay only once. That is, you have no recurring obligation to the company. And the company cannot ask you to pay for the same right issue again.
Another type is partly paid-up shares, where the company may ask to make the full payment. In other words, in the case of partly paid-up shares, the rights issue amount is called by the company in instalments.
Take the case of Bharti Airtel. It has plans to call for rights issue (amount) in three tranches. The first tranche of Rs 133.75 to be paid before October 18. The remaining (Rs 401.25) in two tranches within 36 months. So, if you have applied for rights, then you will have to pay the remaining amount as well. If you don’t pay for the rights (shares) as and when it is called, then your partly paid-up shares will be worthless.
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