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A rights issue is a process by which a company invites its existing shareholders to buy more shares in proportion to their shareholdings. The company sells rights shares at a discount to the current market price. The article explains everything about the rights issue of shares, how it works, why companies offer rights shares, what rights entitlement is, what benefits they offer the company and shareholders and how to apply for rights shares online.
Before we continue, let’s understand the meaning of the rights issue.
When a company issues new shares to its existing shareholders, this is referred to as a rights issue. Rights shares are offered at a discount to the current market price. Shareholders can purchase rights shares proportionately to their existing shareholding or the number of shares they hold.
The company is offering the rights issue to existing shareholders, which will help the company to raise the required capital without attracting new investors.
Rights issue of shares by a growing company offers investors the opportunity to buy more shares directly from the company at a lower price than the market price. However, they are not obliged to apply for rights shares. Those who do not wish to buy more shares can transfer rights entitlement to another shareholder or let them lapse.
Let’s understand rights issue with an example.
A company ABC Ltd offers rights shares in a ratio of 1:4 and the rights issue price is fixed at Rs 20 per share. The current market price per share is Rs 25.
Rights Issue 1:4 means 1 rights share is offered for every 4 shares held by an investor.
An investor owns 200 shares of the company at Rs 25 per share.
Current Investment Value = 200 shares * 25/per share
= Rs 5,000
Rights Issue Entitlement
= 200*1/4 = 50 shares
Thus, investor is eligible to purchase 50 rights shares from the company.
Cost of rights shares
= 50 shares * 20 per share price
= Rs 1,000
Total Investment value after purchasing rights issue
= Rs 5,000 + Rs 1,000
= RS 6,000
Cost per share after rights issue
= Rs 6,000/250
= Rs 24 per share
All in all, applying for more shares at a price lower than the current share price in market helps shareholder to decrease the cost of holding each share. However, if the market price after rights share is higher than Rs 24, it will benefit investor while if it falls below Rs 24, investor will be in loss.
There can be several reasons behind rights issue of shares. Some important reasons for issuing rights shares are described below;
Let’s look at the process of how a rights issue work in share market;
Suppose a company issues rights shares in the ratio of 1:6 i.e. a shareholder holding 6 shares can apply for 1 rights share, a shareholder holding 12 shares can subscribe for 2 rights shares.
Earlier you had to submit physical forms to apply for entitlements, but now with Rights Entitlement, one can purchase rights shares online.
Rights Entitlements or RE represents shareholder to apply for the rights shares. Under Rights Entitlement, the Registrar and Transfer Agent (RTA) of the rights issue credits the rights shares to the demat account of all eligible shareholders. RE is offered in proportion to the number of securities currently held by a shareholder.
These are temporary securities. Shareholders have the option of applying for the rights offered or selling them on the market. Subscription rights are traded on the secondary market just like shares.
If you do not own shares in the company on the record date, you are not an eligible shareholder for the subscription rights. However, you have the option of purchasing RE in the secondary market. In this way, you can not only subscribe to the subscription rights on offer, but also purchase them at a lower price.
A company that raises capital through rights issue of shares offering enjoys several advantages. Here is the list;
When most of the shareholders participate in the rights offer, it develops a sense of shareholder’s trust in the company’s growth trajectory.
Existing shareholders of the company will enjoy various benefits by applying for the rights shares;
Can I apply for rights issues online? Yes!
Most banks in India, including HDFC, ICICI, SBI Axis, Kotak Mahindra, etc. offer ASBA services to their customers to apply for rights issues online. Eligible shareholders who wish to submit applications for the rights shares can use their bank’s net banking portal. The process for applying for a rights offering is similar to applying for an IPO.
Let’s check out how to apply for rights issues online.
In India, KFin Technologies and CAMS are the RTAs. One can submit rights issue applications via RTA also. Here is the process explained;
A rights issue is a good way for the company to raise money from existing shareholders without diluting shareholders' rights, while giving shareholders the opportunity to get more shares at a lower price.
However, not all rights issues are beneficial. If the company is low on cash and desperate to raise capital through the rights issue, applying for such a rights offer may not be a good decision. Before subscribing for rights shares, you need to be careful, research thoroughly and check the fundamentals of the company to make a wise decision.
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Yes, if your bank does not provide ASBA facility, you still have an option to subscribe to the rights issue offline. You can download the rights issue application form from BSE and NSE.
Fill out the required details (DP details, number of shares, PAN number, etc.) attach a cheque or DD, affix your signature, and submit the duly filled form to any Self-Certified Syndicate bank branch.
Once the bank processes the rights issue applications, funds will be blocked in your bank account.
You can apply for rights issue in Zerodha online through ASBA net banking process. ASBA (Applications Supported by Blocked Amount) is a facility offered by banks to subscribe to IPOs, Rights issues, etc.
If you have a bank account in any Self-certified Syndicate Bank like ICICI, HDFC, Axis, IndusInd, Kotak Mahindra, SBI, etc. you can apply for the rights issue. While applying for the rights issues with net banking, you just have to provide Zerodha Demat account details.
Here’s how to apply rights issues with Zerodha;