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What is a Right Entitlement

Introduction

Understanding the concept of right entitlement can act as a key to accessing unique investment benefits. In trading, right entitlement offers perks like reduced share prices and higher ownership chances for investors. these benefits further enable investors to better navigate the market and increase probable profits. Let’s explore how the right entitlement can help investors reach new heights in their investment path.

What is a right entitlement?

Right entitlement is the share granted to eligible shareholders in proportion to their current holdings. A firm issues a right entitlement to its shareholders on a pre-set date known as the 'record date'. Shareholders are offered the right entitlements based on the number of securities they possess on this record date.

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An investor may decide not to purchase the rights issue and let the right expire. In another case, the shareholder may swap or hand over the right  in exchange for a fee. 

What are the types of right entitlement?

According to prevailing settings, right entitlements can have different forms with the two most common types being: 

  • Rights Issues: Current shareholders purchase more shares at a set price to retain proportional ownership.
  • Bonus Issues: Extra shares are freely given to current shareholders, raising the number of shares in circulation.

Who is an eligible shareholder? 

The shareholders who own shares of the firm, as of the record date, are eligible for right entitlement. They can apply for the rights issue or pass the rights entitlement to other interested parties via temporary credit of shares. This transaction takes place through individual Demat accounts only. 

How can an investor apply?

Receiving right entitlement does not automatically imply the investor will get shares under rights issue. They must apply for rights under the entitlements received. This right to apply ensures that the investor can pitch for those number of shares. In addition to the right entitlement, the eligible shareholder can also apply for additional rights shares. However, the allocation is not guaranteed.

What is a renouncer-renouncee relationship?

With 'renunciation', shareholders can transfer their right entitlement (renounce) to other investors who might be interested in buying more shares (renouncee). A shareholder may either completely or partially renounce the right entitlement.

But, neither a renouncer nor a renouncee qualifies for extra shares on top of the right entitlement they already possess. The renunciation of right entitlement is conducted either on-market or off-market.

Does renunciation offer any benefits?

Shareholders can profit from their rights without investing in new shares. Renunciation offers investors freedom and liquidity, enabling them to improve their investment strategies and uncover more value.

How does the process take place?

When a company announces rights issues, eligible shareholders get entitlements in their Demat accounts. Right entitlement can be traded on any open market through a licensed stockbroker. The trade should include a settlement guarantee, and this settlement must be done on a dematerialised basis.

Interested buyers can buy these entitlements and use their options to acquire extra shares at a pre-set price. Right entitlement is traded on reputable stock exchanges, giving a transparent and regulated marketplace for these transactions. Shareholders can take advantage of the possibilities in market and optimise their investment portfolios.

What is the meaning of 'dematerialised basis'?

It refers to the electronic form in which these entitlements are held and traded. A dematerialised central depository system is used to hold securities. Electronic entries into eligible shareholders’ Demat accounts serve as a physical representation of their entitlements. These rights, representing the proportional rights or bonus shares allotted to each shareholder, are shown as digital units.

To conclude

Right entitlement gives shareholders opportunities based on their ownership of shares. They can participate in capital raising attempts and boost their returns via rights and bonus issues. Investors must make well-informed choices to take advantage of investment opportunities offered by right entitlement.

 

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