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 What are Right Entitlement of Share 

stock market
05 Jun 20236 mins readBy MOFSL

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.

How are rights entitlements issued?

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.

Benefits of rights entitlements

A rights issue is beneficial for shareholders because of the following reasons:

  • It gives them the right to subscribe to additional shares at lower rates.
  • By increasing their shareholding, shareholders can increase the dividend-earning potential of their portfolio.
  • They can sell the rights entitlements if they do not wish to subscribe themselves. This gives them the flexibility of owning the additional shares.

Moreover, for companies, a rights issue can be beneficial because:

  • It is a cost-effective way of raising additional capital for their financial needs.
  • They can use the raised capital for expansion and growing the business profitability.
  • The additional capital can also be used for paying off existing debts to reduce leverage. A company with limited debt enjoys a positive market sentiment which might lead to a jump in its share price.

Can shareholders apply for additional shares in the rights issue apart from their entitlement?

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.

What happens to rights entitlements which are neither subscribed nor renounced on or before the Issue Closing Date?

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.

Can I buy or sell Rights Entitlement on Motilal Oswal?

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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Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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