Do you trade in stocks?
If you do, you must have encountered the term ‘rights issue’.
Rights issue or Right Entitlement of Share is when listed companies offer additional shares to their existing shareholders. This is primarily done to raise additional capital for corporate needs.
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The shares under the rights issue are sold at a rate lower than the prevailing market rate. This gives an edge to existing shareholders as they can increase their shareholding at a discounted rate. Conversely, companies can benefit through the fresh capital that the Right Entitlement of Shares brings.
Companies issue rights entitlements at a specified date. This date is called the record date—shareholders who own the company’s shares on this record date become eligible for the rights entitlements.
Each shareholder is allowed a specified number of Right Entitlement of Shares depending on his already owned shares.
For instance, say you hold 100 shares of Company A, which offers a Right Entitlement of Shares in the ratio of 2:1. This means you can buy two rights entitlements for every share held. Thus, you can opt for 200 additional shares under the rights issue.
A rights issue is beneficial for shareholders because of the following reasons:
Moreover, for companies, a rights issue can be beneficial because:
There’s no limit on the number of shares shareholders can apply for under the Right Entitlement of Share. They can even apply for additional shares apart from their entitlement. However, the story is different when it comes to the allotment of the shares.
Shareholders are allotted shares based on their eligibility, i.e., the number of shares they held on the record date and the ratio of the rights issue. Moreover, the allotment would also depend on the number of shares available with the company.
Each Right Entitlement has a unique ISIN (International Securities Identification Number). After the entitlements are issued, eligible shareholders can either subscribe to the issue partially or fully or renounce it and trade it on the secondary markets.
However, if any right entitlement is neither subscribed nor renounced within the Issue Closing Date, such entitlements lapse. Their ISINs are also suspended.
Motilal Oswal allows you to buy or sell rights entitlements online in simple steps. You can apply for the issue, and the shares will be credited to your Demat account maintained with Motilal Oswal. If you want to trade your eligible entitlements, you can renounce them through your online account and sell them on the National Stock Exchange through Motilal Oswal. When someone buys the rights entitlement from you, the amount will be credited to your linked bank account.
So, understand what a right entitlement is and how it works. If you are an existing shareholder, watch for possible rights issues your company might declare. If it does, assess your investment strategy, subscribe to the rights issue, or renounce it to raise additional funds yourself.
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