Rights Issue

A rights issue is one of the means by which a company can obtain funds. It enables stockholders to purchase extra shares. The shares are sold at a price lower than their market value. Since shareholders get the first chance to purchase, it is referred to as a rights issue. They can purchase it before the shares are offered to the general public.

Firms usually go for a rights issue when they need more capital. This might be to repay debts, to expand the business or to improve finances.

A 1:3 rights issue, for example, gives shareholders the opportunity to purchase one extra share for every three that they have. They are able to purchase this at a price discount offered by the company.

If the firm performs well in the future, investors can earn from a rights issue. However, before investing in a firm that's making an issue of rights because it's experiencing financial difficulties, investors should examine the pitfalls.

Whether or not purchasing a rights issue is a wise move largely depends on many aspects.

Advantages of purchasing a rights issue

• Discounted price: The shares are sold at a discounted price compared to the market price, which can be advantageous if the company does well in the future.
• No additional charge: No brokerage or trading charges are incurred if one purchases rights issue shares.
• Long-term growth: If the company is using the money for expansion or debt repayment, then it will become more powerful in the future and value the stock more.

Drawbacks of purchasing a Rights Issue

• Short-term market effect: At times, a rights issue has the effect of lowering share prices in the short run.
• Company's financial health: If the company is issuing rights for financial distress reasons, it would not be a good idea to invest.
• Shareholding dilution: If you fail to purchase the new shares, your level of ownership in the company would reduce.

When you might buy a rights issue

• If you think the company possesses good growth opportunities.
• If the company is employing funds for expansion, and not to merely fund losses.
• If the discount price is appealing in view of future growth opportunities.

To apply for a rights issue is easy. Shareholders are sent an offer letter by the company with the details of the issue. The period for making the application is typically short, so shareholders have to move fast. Here is how you apply:

Steps to apply for a rights issue:

• Check your eligibility: Application is possible only by existing record date shareholders.
• Accept the offer of the rights issue: The company shall send a notice through your registered e-mail, or postal address.
• Choose to apply or sell your rights: If you want to apply, then follow the subsequent steps. Otherwise, you can sell your rights entitlement in the stock market.
• Apply online via your broker: The majority of brokers offer an online platform to apply for rights issues. Login to your Demat account and apply.
• Pay for the issue: Pay the amount as demanded according to the number of shares you want to purchase. Payment can be done using net banking, UPI, or bank transfer.
• Get the allocated shares: After the process of rights issue is finalized, the shares purchased will be credited in your Demat account.

If you don't wish to purchase the rights issue shares, then you can sell them in the open market. This is termed as Rights Entitlement trading.

Procedure to sell rights issue shares:

• Verify trading permission for rights issue shares: Certain companies provide rights entitlement for trading on the stock exchange.
• Find the rights entitlement in your Demat account: If you are eligible, you will find a special Rights Entitlement (RE) share in your account.
• Sell on the stock exchanges: You can sell your RE shares like a regular stock through your broker.
• Receive payment: After selling, the amount is credited to your account.
• If you fail to sell or subscribe to the rights issue within the specified period your rights entitlement will lapse, and you can miss out on its benefits.

Share price generally falls after a rights issue but this varies depending on various factors such as:

• Increase in number of shares: A rights issue adds to the number of shares in the market, lowering the value per share.
• Dilution of ownership: Shareholders who don't take up the rights issue will have their ownership proportion reduced.
• Market sentiment: Investors will see the rights issue as a signal that the business is under strain, resulting in a short-term fall in share price.