Introduction

The rights issue of shares is a strategic fundraising method employed by companies to raise additional capital by offering existing shareholders the right to purchase additional shares at a discounted price. This mechanism not only benefits the company but also offers a lucrative opportunity for shareholders to increase their stake. In this blog, we will explore everything you need to know about rights issues what they are, their benefits, and how you can successfully apply for them.

What is the Rights Issue of Shares?

The right issue of shares allows existing shareholders to buy additional shares directly from the company in proportion to their current shareholding. These shares are usually offered at a price lower than the market value, making it an attractive option for shareholders to enhance their ownership.

Companies opt for rights issues to raise funds for expansion, debt repayment, or operational requirements. Unlike other fundraising methods, the rights issue prioritizes existing shareholders, ensuring that they have the first claim to the additional shares being issued.

Understanding the Rights Issue of Shares

To understand the rights issue better, it is essential to differentiate it from other share allotment methods like bonus issues. While a bonus issue provides additional shares to shareholders free of cost, a rights issue involves a monetary transaction where shareholders purchase additional shares at a discounted price.

Key Features of Right Issue of Shares:

• Proportionate Allocation: The offer is proportional to the existing shareholding. For example, a 1:2 rights issue means you can buy one additional share for every two shares you already own.
• Discounted Price: Shares are offered at a price lower than the market value, making it an attractive proposition for shareholders.
• Optional Participation: Shareholders can choose to exercise their rights partially, fully, or even transfer their rights to another investor.

Eligibility for Rights Issue

To participate in a rights issue, you must be a shareholder on the record date specified by the company. Only shareholders who hold the company’s stock on this date are eligible to receive the offer.

Key Considerations:

• Record Date: This is the cut-off date to determine the shareholders eligible for the rights issue.
• Renunciation: If you do not wish to buy the right shares, you can transfer your rights to another investor in the secondary market.
• Payment Terms: The terms of payment whether full or partial are specified in the offer document.

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Rights Issue Procedure: Step-by-Step Guide

The rights issue procedure is straightforward. Here’s a step-by-step guide to help you navigate the process:

Step 1: Check the Record Date

Ensure you own the company’s shares on the record date to be eligible for the rights issue. This date is critical as only shareholders on this date can participate in the offer.

Step 2: Receive the Offer Letter

The company sends an offer letter containing all the details of the rights issue. This includes:

• The number of shares being offered.
• The issue price of the shares.
• The ratio of right shares (e.g., 1:2 or 2:5).
• The timeline for application and payment. Carefully review the offer letter to understand the terms and decide on your next steps.

Step 3: Decide on Participation

Evaluate whether to:

• Subscribe Fully: Apply for all the shares you are entitled to.
• Subscribe Partially: Apply for a portion of the shares offered.
• Renounce Rights: Transfer your rights to another investor in the secondary market. Consider factors such as your financial goals, the company’s growth prospects, and your existing portfolio.

Step 4: Apply for the Right Shares

You can apply through:

• Offline Method: Fill out the application form sent with the offer letter and submit it to the company’s registrar or designated bank along with payment.
• Online Method: Use your broker’s platform or banking portal to apply. This typically involves logging into your demat account, selecting the rights issue, entering the details, and making payment via ASBA. Ensure accuracy in the application to avoid rejection.

Step 5: Allotment and Trading

After the application process:

• The company will allot the shares to eligible applicants. This may take a few days post-closure of the issue.
• The allotted shares are credited to your demat account.
• Once listed on the stock exchange, these shares can be traded like any other equity shares. Keep an eye on market movements to make informed decisions about holding or selling the shares.

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How to Buy Right Issue Shares?

If you are wondering how to buy rights issue shares, the process is simple. Here’s what you need to do:

Offline Method:

1. Fill out the Application Form: The form provided by the company must be completed with your details.
2. Submit Payment: Make the payment as per the instructions provided in the offer document.
3. Send the Form: Submit the completed form to the company’s registrar or designated bank.

Online Method:

1. Login to Your Demat Account: Use your broker’s platform to access the rights issue section.
2. Select the Rights Issue: Choose the rights issue you wish to participate in.
3. Make Payment: Use the ASBA (Application Supported by Blocked Amount) process for seamless payment.
4. Confirm Submission: Review and submit your application.

ASBA Rights Issue: Simplified Application Process

The ASBA rights issue process has simplified how shareholders apply for rights issues. ASBA ensures that the application amount is blocked in your bank account until the shares are allotted, eliminating the need for upfront payment.

Benefits of ASBA:

• No Upfront Payment: The application amount is only debited after the share allotment.
• Ease of Application: ASBA-enabled applications can be submitted through your broker’s platform or designated banks.
• Enhanced Security: Funds remain in your account until the allotment.

Using ASBA rights issue ensures a seamless, hassle-free experience for shareholders.

How to Apply for Rights Issues Using Online Platforms

With advancements in technology, applying for a rights issue has become more convenient. Online platforms offered by brokers simplify the entire process.

Step-by-Step Guide:

1. Login to Your Demat Account Access your broker’s platform by logging into your Demat account. Ensure you have the necessary credentials ready to avoid delays.
2. Navigate to Corporate Actions On the broker’s platform, locate the “Corporate Actions” or similar section. This is where companies’ rights issues, bonus issues, and other corporate actions are listed.
3. Select the Rights Issue Browse the list of available rights issues and select the one you are eligible for. Click on it to view the details such as the issue price, ratio, and deadlines.
4. Enter Application Details Specify the number of shares you wish to apply for based on your entitlement. You can choose to apply for additional shares if the option is available.
5. Make Payment via ASBA Complete the payment process through ASBA. This method blocks the required amount in your bank account until the shares are allotted. Ensure your bank account linked to the Demat account has sufficient funds.
6. Submit Application Review all the entered details carefully. Once satisfied, submit your application. You will receive a confirmation receipt or notification from your broker, indicating that your application has been successfully submitted.

Benefits and Risks of Investing in the Rights Issue of Shares

Benefits:

• Discounted Price: Shares are offered at a price lower than the market rate.
• Proportionate Allocation: Opportunity to maintain or increase your stake in the company.
• Renunciation Rights: Flexibility to transfer your rights to another investor.

Risks:

• Dilution of Ownership: Not participating may dilute your stake.
• Company Performance: The value of right shares depends on the company’s financial health.
• Market Volatility: Changes in market conditions can affect the share price.

Conclusion

The right issue of shares is a valuable opportunity for shareholders to reinforce their investment while supporting the company’s growth. With platforms like Jainam Broking Ltd., applying for a rights issue has become more accessible than ever. Jainam Broking’s expertise in handling rights issue procedures ensures that you receive the guidance and tools needed to make informed decisions.

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