The Right Issue of Shares is an invitation by a company to its existing shareholders to purchase additional shares at a discounted price. This strategy allows the company to raise capital without approaching the market, ensuring that the existing shareholders have the opportunity to maintain their proportional ownership.
- What Is the Right Issue?
- Rights Issue Example
- Advantages And Disadvantages Of Right Issue
- Procedure For Right Issue Of Shares
- Difference Between Right Issue And Bonus Issue
What Is the Right Issue?
A rights issue is a process where a company offers its existing shareholders the opportunity to buy additional shares before selling them in the open market. These shares are typically offered at a lower price and in proportion to the shares already owned. For example, a 1:3 rights issue means that for every three shares an investor owns, they can buy one more at a discounted price.
Rights Issue Example
The best example of a rights issue is Reliance Industries Limited, which announced a rights issue in 2020. Shareholders were offered one new share for every 15 they owned at a price of ₹1,257, a discount compared to the market price at the time. The company aimed to raise ₹53,125 crores to reduce debt and finance new projects.
Existing shareholders could buy these shares at a discounted price or sell their rights to someone else. This particular rights issue was significant in the Indian market and became an exemplar of how rights issues can be utilized strategically.
Advantages And Disadvantages Of Right Issue
The main advantage of a rights issue is that it allows companies to raise capital without increasing their debt.
Other benefits include:
- Shareholder Loyalty: Existing shareholders get preference, enhancing loyalty.
- Discounted Price: Shares are offered at a discount to the current market price.
- Avoiding Underwriting Costs: Often cheaper than public offerings.
The main disadvantage is that it may dilute the share price if not all shareholders participate.
Other downsides include:
- Complex Process: Requires careful planning and execution.
- Potential Over-dilution: Can lead to a drop in share price if poorly executed.
- Limited to Existing Shareholders: Does not attract new investors.
Procedure For Right Issue Of Shares
The Board of Directors initiates the rights issue process, adhering to SEBI regulations in India. After determining eligible shareholders by a set record date, the company dispatches the rights offer for acceptance or rejection. The process concludes upon offer closure and subsequent share allotment to accepting shareholders.
- Board Approval: The Board of Directors must approve the rights issue, deciding the ratio, price, and record date.
- Regulatory Compliance: Companies need to comply with the regulatory requirements as laid down by SEBI in India.
- Draft Letter of Offer: A detailed letter including all relevant information is drafted and submitted to the authorities.
- Record Date Determination: The company sets a record date, identifying shareholders eligible for the rights issue.
- Dispatch of Rights Offer: Eligible shareholders receive the rights offer along with instructions to apply.
- Acceptance or Rejection: Shareholders can accept, partially accept, or reject the offer, and they can also trade their rights.
- Issue Closure: The offer is closed on the specified date, and the shares are allotted to those who accepted the offer.
Difference Between Right Issue And Bonus Issue
The primary distinction between a right issue and a bonus issue is that the shares in a right issue are sold at a discount, whereas the shares in a bonus issue are provided at no cost to the investor.
|Parameters||Right Issue||Bonus Issue|
|Nature of Issue||Discounted price: Shareholders buy additional shares at a discount.||Free of charge: Additional shares are distributed for free.|
|Purpose||Raising capital for expansion, debt reduction, etc.||Capitalization of reserves and profits.|
|Shareholder’s Option||Can accept, reject, or trade rights.||No option to reject; shares are automatically credited.|
|Effect on Share Capital||Increases share capital through new share issuance.||Rearrangement of share capital, not an increase.|
|Effect on Shareholder’s Wealth||May or may not affect wealth, depending on various factors.||No effect on total wealth as shares are free.|
|Regulatory Compliance||Governed by SEBI regulations in India.||Governed by the Companies Act in India.|
|Impact on Market Price||Possible impact, depending on uptake and market perception.||Usually no significant immediate impact on market price.|
Who is eligible for the rights issue?
Eligibility for a rights issue is primarily extended to existing company shareholders as of the record date. The company sets the record date, and anyone who owns shares on that date is eligible to participate in the rights issue.
- Must be an existing shareholder on the record date.
- Must comply with the terms and conditions of the rights issue.
- Must respond within the specified timeframe of the offer.
How To Apply For Rights Issue?
Applying for a rights issue is a relatively straightforward process but requires adherence to specific steps. To apply for a right issue via Alice Blue, you need to follow these steps:
- Create a UPI ID for your bank account on the BHIM UPI app.
- Login to your Alice Blue account.
- Click on the “Rights Issue” tab.
- Select the right issue you want to apply for.
- Enter the number of shares you want to apply for.
- Enter your UPI ID.
- Accept the mandate request on your UPI app.
- Your application will be submitted.
When a company decides to issue additional shares through a rights issue, the existing shareholders are the first to know. They receive a formal notification known as a “Rights Offer.” This offer contains detailed information about the rights issue, including:
- Offer Price: This is the price at which the existing shareholders can purchase the new shares. It’s usually set at a discount to the current market price to encourage participation.
- Number of Shares: The rights offer will specify the shares a shareholder can purchase. It is generally in proportion to the existing holdings of the shareholder.
- Offer Period: The time frame within which the shareholder must decide whether to accept, ignore, or trade the rights. This period is regulated, and in India, it is typically a minimum of three days.
- Procedure for Acceptance: The rights offer will outline the specific steps that need to be taken to accept the offer. It may include filling out an application form or completing an online process.
- Options to Trade or Renounce: Sometimes, rights are tradable. Shareholders can sell their rights to other investors if they do not wish to participate in the rights issue. Alternatively, they can choose to ignore or renounce their rights.
- Payment Details: If the shareholder decides to exercise the rights, they must make payment as per the instructions in the offer. It may include bank transfer, cheque, or online payment options.
Once the rights offer is received, the shareholder must carefully review the details and decide whether to participate in the rights issue. If they choose to do so, they follow the prescribed procedure for acceptance and make the necessary payment.
What Is Right Issue Of Shares – Quick Summary
- The Right Issue of Shares allows companies to offer existing shareholders additional shares at a discounted price.
- This strategy aids in raising capital without increasing debt or going to the public market.
- A notable example is Reliance Industries Limited’s rights issue in 2020, offering shares at a significant discount.
- Advantages include capital raising without debt, enhancing shareholder loyalty, offering shares at a discount, and avoiding underwriting costs.
- Disadvantages include potential share price dilution, complexity, over-dilution risks, and limitation to existing shareholders.
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What Is Right Issue – FAQs
What Is the Right Issue Of Shares?
A rights issue of shares is an invitation by a company to its existing shareholders to purchase additional new shares at a discounted price. It’s a way for the company to raise additional capital, often for specific projects or debt reduction.
What is the minimum offer period for rights issues?
In India, the minimum offer period for a rights issue is generally three days. It allows eligible shareholders enough time to make an informed decision regarding participation.
What is the rule for the right issue?
- Compliance with SEBI Guidelines: Companies must follow the guidelines provided by the Securities and Exchange Board of India (SEBI).
- Minimum Subscription: Usually, a minimum amount of subscription must be attained.
- Offer Period: Adhering to the minimum and maximum offer period as per regulations.
- Transparent Disclosure: Companies must disclose all relevant information in the offer document.
What documents are required for the right issue of shares?
- Notice of Board Meeting
- Letter of Offer
- Subscription Period of Acceptance
- Form MGT-1
- Accept Application Money
- Second Board Meeting
- Allotment of Shares
- Filing of Forms to ROC
- Issue Share Certificate