What is Rights Issue?
A rights issue is an invitation to existing shareholders to buy more shares at a discounted price. Shareholders need to apply for rights issue before the record date. It is also known as the cut-off date.Existing shareholders have rights but no obligation to buy these shares. However, this gives them an opportunity to increase their stake within the company.The primary reason why companies do rights issue is to raise money. This does not mean that the company is incurring losses and hence is in need of capital.Rights are issued for various reasons like -1. Business Expansion or AcquisitionFunds are needed when a company plans to grow its business. Raising fresh capital gives them an opportunity to offer a diverse range of services.Many companies did rights issue during the Covid-19 pandemic. This includes companies with strong fundamentals like L&T Finance Holdings Limited, Tata Power, etc. These companies have raised more than Rs. 10,000 crores through rights issue during the pandemic.2. Become Debt-FreeReliance Industries opted for a rights issue in 2020 to become debt-free. The company used the net proceeds towards repayment of their borrowings.They successfully closed their rights issue at Rs. 53,124 crores on June 3, 2020. This was India's largest-ever rights issue. It is also the world's largest rights issue by a non-financial institution in the last ten years.Different types of Rights Issues:
1. Renounceable Rights IssueThe shareholder has the option to buy the shares by exercising their right or ignore the right. They can also sell or transfer their rights to other investors in an open market.2. Non-Renounceable Rights IssueThe shareholder cannot sell his/her rights to another investor. They only have the option to either exercise the right or give it up.Understanding with an example – Reliance Industries Rights Issue
Reliance Industries Limited had issued rights in May 2020. Here are the details of the rights issued -Particulars: | Reliance Industries Rights Issue Detail: |
Issue Open | May 20, 2020 to June 3, 2020 |
Record date | May 14, 2020 |
Security Name | Reliance Industries Limited |
Issue Size (Shares) | 42.26 Crores |
Issue Size (Amount) | ₹53,125 Crores |
Issue Price | ₹1,257 per share |
Share Price on the date of announcement (11th May 2020) | ₹1,561.94 per share |
Listing on | BSE, NSE |
Terms of Payment | 25% on application |
Rights Entitlement | 1 share for every 15 shares held on the Record Date |
Rights Issue Benefits:
The rights issue offers several benefits to the company as well as the shareholder.Benefits for the company -- Rights issue is one of the fastest methods for a company to raise fresh capital from their existing shareholders. The company needs to hold a board meeting and pass resolution for issuance of shares under Rights Issue.
- They incur lower issue costs and save on various expenses like advertising, underwriting fees, etc.
- This is the best way to raise funds without increasing the debt burden.
Rights Issue Disadvantages:
Rights issue leads to dilution in the value of holdings of the existing shareholders. Let's understand this with the help of an example.Scenario A:Raj invites 10 people to his birthday party. They cut the cake equally in 10 pieces.Scenario B:Raj invites 20 people to his birthday party. They cut the same cake (same size) equally in 20 pieces.In both the cases, everyone gets a piece of the cake. But the piece of cake will be bigger in scenario A than scenario B.This is because the cake was divided between 20 people in scenario B.Similarly, when the number of outstanding shares increases, your holding proportion dilutes.This also impacts the Earnings Per Share (EPS) of the company. It is calculated as a company's profit divided by the outstanding number of shares. It indicates how much profit a company is earning per shareholder.How to apply for Rights Issue in India?
It can be applied online or offline using -- Applications Supported by Blocked Amount (ASBA) facility
- Registrar's Web-based Application Platform (R-WAP) facility.
Rights Issues by Companies in 2021:
No. | Company Name | Issue Open | Issue Close | Issue price (Per Share) | Issue Size - Shares (Cr) | Issue Size - Amount (Cr) |
1 | Sundaram Finance Holdings Limited | May 06, 2021 | Jun 02, 2021 | 50 | 7.1 | 10 |
2 | KDDL Limited | Apr 09, 2021 | May 07, 2021 | 230 | 0.11 | 10 |
3 | India Grid Trust | Apr 06, 2021 | Apr 13, 2021 | 110 | 10 | 10 |
4 | WeP Solutions Limited | Mar 24, 2021 | Apr 19, 2021 | 10 | 0.99 | 9.87 |
5 | Emerald Leasing Finance and Investment Company Limited | Mar 22, 2021 | Apr 05, 2021 | 10 | 2 | 10 |
6 | Rajapalayam Mills Limited | Mar 15, 2021 | Mar 30, 2021 | 569 | 0.12 | 10 |
7 | Arvind Fashions Limited | Mar 04, 2021 | Mar 18, 2021 | 135 | 1.48 | 10 |
8 | Authum Investment & Infrastructure Limited | Mar 01, 2021 | Mar 15, 2021 | 81 | 0.46 | 10 |
9 | Patel Integrated Logistics Limited | Feb 26, 2021 | Mar 12, 2021 | 10 | 0.95 | 9.5 |
10 | L&T Finance Holdings Limited | Feb 01, 2021 | Feb 15, 2021 | 65 | 10 | 10 |
11 | Urja Global Limited | Jan 25, 2021 | Feb 10, 2021 | 5 | 5 | 10 |
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