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What is Right Issue and how to apply for Right Issue

07 Jun 2023

Companies need a regular source of funding to run the business. Moreover, fresh capital might be needed if there’s an expansion on the cards.

When raising fresh capital, companies might turn to rights issues and expand their capital base. Let’s understand the rights issue and how you can apply for one if your company offers it.

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What is a rights issue?

A rights issue is a new issue of additional shares by a listed company. The company offers additional shares to existing shareholders in a particular ratio. The rights issue is issued on a specified date called the record date.

Shareholders can buy the additional shares at a discounted price through a rights issue.

Some important features of a rights issue are as follows:

  • One of the primary benefits of a rights issue is that it allows shareholders to buy additional shares at a discounted price. For example, if the market price of a share is ₹500, the company might offer additional shares at ₹400 to attract shareholders to subscribe to the issue.
  • You can subscribe to the rights issue, buy the stock, or sell the entitlement in the secondary market.
  • The rights issue is issued in a particular ratio. Additional shares are issued in that ratio. For instance, if the ratio is 1:1, you will get one additional share for every share held.
  • Suppose you are not the existing shareholder of a company. In that case, you can subscribe to the rights issue by buying the entitlement from the stock exchange if any existing shareholder sells their share.

What is rights entitlement?

Rights entitlement is the temporary issue of the number of shares to existing shareholders in the specified ratio of their existing shares. The shares are credited to the Demat account temporarily, giving shareholders the option but not the mandate to subscribe to the additional shares issued through a rights issue.

What options are available to an eligible equity shareholder in a rights issue?

In a rights issue, the following options are available to eligible equity shareholders:

  • Exercising the rights entitlement 

Shareholders can exercise their rights entitlement and buy the additional shares at discounted rates within the specified period.

  • Renouncing the rights entitlement 

Shareholders can renounce the entitlement if they don’t want to buy the additional shares.

  • Selling on secondary markets 

Another option is to sell the rights entitlement on the secondary market if shareholders don’t want to exercise it themselves. This allows them to sell the entitlement to an interested investor at a price bringing in additional income for shareholders.

  • Lapse of the entitlement 

The entitlement lapses if the shareholders neither exercise nor denounce the rights entitlement within the specified date.

How to apply for Rights issues?

There are different ways to apply for the rights issue. They are as follows:

  • Through ASBA

If your bank allows the Applications Supported by Blocked Amount (ASBA) process, you can apply for the rights issue through it.

  • Through the RTA 

The Registrar and Transfer Agent (RTA) of the company issuing the rights issue sends the Composite Application Form (CAF) to shareholders who cannot apply for the rights issue online. These forms are couriered to the registered address. You can complete and submit the CAF at a Self-Certified Syndicate Bank (SCSB) branch. The form contains details of your cheque number and date, the depository participant (DP) identification number, PAN details and signature.

Motilal Oswal allows you to apply for rights issues online. Check the eligible issues and apply for them online through your account. Pay the required amount, and the shares are credited to your Demat account.

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