Introduction

Investing in the stock market involves understanding various corporate actions, and one of the most common among them is the right issue of shares. But what exactly are the right shares, and why do companies offer them? A right issue is a corporate action where a company allows its existing shareholders to buy additional shares at a discounted price, typically to raise capital. These shares are often referred to as “right shares,” as shareholders have the “right” to purchase them before they are offered to the public.

In this guide, we’ll explore what the right issue of shares is, the procedure involved, and its significance for both companies and investors.

Understanding the Concept of the Right Issue

What is the Right Issue?

A right issue is a method used by companies to raise funds. In this process, existing shareholders are given the option to purchase additional shares, usually at a price lower than the market value. The main purpose of a right issue is to generate capital for business expansion, debt reduction, or other financial needs.

For example, if a company announces a 2:5 right issue, it means shareholders can purchase two additional shares for every five shares they currently own. This mechanism ensures that existing shareholders maintain their proportional ownership in the company.

How Does a Right Issue Work?

Here’s how a typical right issue process unfolds:

Announcement:

The company announces the right issue of shares, providing shareholders with key details such as the offer price, ratio of rights entitlement (e.g., 2:5), record date, and offer period. This communication is critical for transparency and planning.

Record Date:

This is the cut-off date set by the company to determine the eligibility of shareholders. Only those holding shares on or before this date are entitled to receive rights entitlements. This ensures that the offer is extended only to the rightful shareholders.

Offer Period:

During the offer period, eligible shareholders have the opportunity to apply for the right shares. This period typically spans 15 to 30 days, giving investors adequate time to review the offer and make their decisions. Shareholders can choose to fully subscribe, partially subscribe, or even renounce their rights.

Subscription:

To participate, shareholders apply to the number of shares they wish to purchase. They can apply through the ASBA (Application Supported by Blocked Amount) facility via their trading account or designated bank. The amount for the applied shares is blocked in the investor’s account until allotment, ensuring a seamless process.

Allotment:

After the subscription period ends, the company allocates shares to eligible applicants. In cases where shareholders do not subscribe to their full entitlement, the company may offer the unsubscribed portion to other investors or the general public. The allotted shares are then credited to the shareholders’ demat accounts.

This structured approach ensures that the right issue is conducted in a fair, transparent, and efficient manner.

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The Procedure of Right Issue of Shares

The right issue procedure involves several steps to ensure transparency and compliance:

1. Board Approval: The company’s board of directors carefully evaluates the need for the right issue of shares and approves the proposal. Key terms, such as the issue price, ratio, and timeline, are finalized during this stage.
2. Shareholder Approval: The proposal is placed before shareholders for their consent, typically at an annual general meeting (AGM) or an extraordinary general meeting (EGM). Shareholder approval ensures alignment with corporate governance standards.
3. Drafting and Filing: A letter of offer is meticulously drafted, providing comprehensive details about the right issue. This document is then filed with the Securities and Exchange Board of India (SEBI) for review and approval, ensuring compliance with regulatory requirements.
4. Announcement: The company publicly announces the right issue of shares through official channels such as stock exchanges and newspapers. The announcement includes vital information such as the issue price, entitlement ratio, record date, and offer period to keep shareholders informed.
5. Offer Period: The company opens the subscription window for a specified period, usually ranging from 15 to 30 days. During this time, eligible shareholders can apply for the right shares by submitting their applications through the ASBA facility or other approved methods.
6. Allotment and Listing: After the offer period concludes, the company allots shares to the subscribers based on their applications. Any unsubscribed portion may be offered to other investors or the general public. Finally, the newly issued shares are listed on the stock exchange, making them available for trading.

ASBA Rights Issue: Simplifying the Application Process

Application Supported by Blocked Amount (ASBA) is a SEBI-mandated process for applying to the right issues. ASBA allows investors to apply for shares without transferring funds upfront. Instead, the amount is blocked in their bank account and debited only upon allotment.

To use ASBA for a rights issue:

• Fill out the ASBA form provided by your bank or broker.
• Submit the form through your online trading account or physical application.
• Ensure sufficient funds are available in your account until the allotment.

How to Apply for a Right Issue

Buying the right issue shares is a straightforward process. Here’s a detailed guide to help you through:

1. Check Eligibility: Begin by ensuring that you are an existing shareholder on the record date specified by the company. Shareholders listed as eligible on this date are entitled to receive rights entitlements (REs).
2. Review the Offer: Carefully examine the letter of offer issued by the company. This document provides critical details such as the number of shares you are eligible to apply for, the offer price, and the timeline for application. Assess the company’s objectives for the right issue and determine whether it aligns with your investment strategy.
3. Trading of Rights Entitlements (REs): If you decide not to subscribe to the offered shares, you have the option to trade your rights entitlements on the stock exchange. This allows you to monetize your entitlement instead of letting it lapse. Be mindful of the trading window for REs, as it usually closes a few days before the subscription period ends.
4. Apply Through ASBA: Use the Application Supported by Blocked Amount (ASBA) facility to submit your application. Log in to your trading account or contact your bank to access the ASBA form. Fill out the required details, including the number of shares you wish to apply for. Ensure that your bank account has sufficient funds to cover the application amount, as these funds will be blocked until the allotment process concludes.
5. Submit and Confirm: After filling out the form, submit it through your online trading account or physically at your bank branch. Double-check the details to avoid errors that might delay processing.
6. Monitor Allotment Status: Once the application period ends, track the allotment status through your trading account or the registrar’s website. The allotted shares will be credited to your demat account upon successful allocation.

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Detailed Guide on How to Apply for the Right Issue

Applying for the right issue involves the following steps:

• Login to Trading Account: Access your broker’s platform.
• Locate Rights Issue Option: Navigate to the corporate actions or IPO section.
• Fill Application Form: Provide details such as the number of shares you wish to apply for.
• Submit and Confirm: Review and confirm your application.
• Track Status: Keep an eye on the status of your application and the allotment timeline.

Benefits and Risks of the Right Issue

Advantages for Shareholders

1. Discounted Price: Right shares are typically offered at a lower price than the market rate.
2. Proportional Ownership: Shareholders can maintain their ownership percentage in the company.
3. Trading Flexibility: Rights entitlements can be traded on the stock exchange.

Potential Risks to Consider

1. Dilution of Ownership: Non-participation may dilute your ownership percentage.
2. Market Volatility: Share prices may fluctuate due to the announcement of the right issue.
3. Financial Risks: Investing in additional shares may not yield expected returns if the company’s performance doesn’t improve.

Right Issue vs. Bonus Issue: Key Differences

When Should Investors Consider Participating in the Right Issue of Shares?

• Company Potential: Participate if the company has strong growth prospects.
• Discounted Price: Leverage the discounted price to enhance your portfolio.
• Strategic Investment: Use the opportunity to increase your stake in the company.

Conclusion

The right issue of shares offers a unique opportunity for existing shareholders to invest further in a company at a discounted price. While the process is simple and accessible, it’s crucial to evaluate the company’s financial health, growth potential, and the purpose of the capital raised.

Jainam Broking Ltd. offers expert guidance and support, simplifying the right issues for all investors and equipping them with the tools to make informed decisions.

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