A recent popular instrument in Indian stock markets is the trading of rights entitlement of various companies with much fanfare. The rights entitlement instrument has 40% circuit limit in both BSE and NSE where their trading happens. This has lured the gullible investors who are looking for quick returns in markets, as always. The rights entitlement of companies that came with rights issue have traded at abnormal prices compared to their actual market price. Many investors have taken the plunge and bought these instruments without knowing what it is.
The rights entitlements have a specific time frame within which one has to apply for rights shares or sell it before they stop from trading. These instruments cannot be traded intraday. So, one has to take delivery of these instruments before applying for the rights issue within the issue period or selling them in the market again.
Several investors have no clue on what it is and have just bought them from the market thinking it to be like regular shares traded in the market. Some of them have not applied for the rights shares within the issue period and saw them disappear from their demat account.
The rights entitlement instrument offers an investor option to buy the share as per the price fixed by the company. The investor who holds the rights entitlement instrument should claim their entitlement by applying for shares during the issue period or sell the rights entitlement by renouncing the rights entitlement to others for an amount based on market price. If the rights entitlement is not used by the closing date of the rights issue, then it lapses. If any investor has bought the rights entitlement from market through rights renunciation and not applied for the rights issue, the money spent on acquiring the rights entitlement goes down the drain.
Some recent examples of abnormal prices of rights entitlement instrument:
Refex Industries Limited - In BSE, the rights entitlement of this company's shares opened on July 27, 2020 at Rs. 2.25 and hit a high of Rs. 21 on August 3, 2020 and finally traded at Rs. 8.05 on August 6, 2020. The company offered shares on rights basis at Rs. 45 per share and the issue closed on August 10, 2020. If an investor had bought rights entitlement of this company from market, he / she should have shelled out Rs. 45 extra and applied for rights shares during the issue period. The company's shares traded between Rs. 46 and Rs. 54 during this period. So, anybody who bought the rights entitlement from the market could have rather bought the existing listed shares.
Gateway Distriparks Limited - In BSE, the rights entitlement of this company's shares opened on July 30, 2020 at Rs. 11.06 and hit a high of Rs. 42.40 on August 5, 2020 and finally traded at Rs. 14 on August 7, 2020. The company offered shares on rights basis at Rs. 72 per share and the issue closed on August 13, 2020. If an investor had bought rights entitlement of this company from market, he / she should have shelled out Rs. 72 extra and applied for rights shares during the issue period. The company's shares traded between Rs. 79 and Rs. 86 during this period.
What is a letter of offer?
The letter of offer (offer document) is an information memorandum prepared by the company proposing to raise funds through rights issue. It contains all the details regarding the rights issue including offer terms, funds usage, parties involved in raising funds etc.
What is a rights entitlement?
Companies can raise funds through various avenues like public issue, preferential issue and rights issue. The Rights Issue is an avenue for raising funds to augment company's fund requirements through issue of shares to its existing shareholders. The rights entitlement is an instrument which entails the shareholders to be eligible for applying to company's shares at a fixed price as proposed by the company in the offer document.
What is the record date of a rights issue?
The record date is the eligibility date for getting rights issue. The shareholders who hold the shares of company in their demat account as of the specified date (record date) are eligible to apply for company's shares in the rights issue.
What is the ex-date?
Ex-date is the date when the existing shares of the company traded in the stock exchange becomes ex-rights. This means whoever buys the shares of the company on ex-date or after that will not be eligible for applying in the proposed rights issue.
What is the ratio of rights issue?
The company specifies the ratio of shares to be issued to the existing shareholders as of record date, based on the fund requirements of the company. This ratio is specified in the letter of offer.
What is the issue period?
The issue period is the schedule of the rights issue. The rights issue has a specific opening date and closing date within which the eligible shareholders have to apply for the rights issue of the company either online or offline.
What is the opening date?
The opening date is the date on which the rights issue opens for subscription by all eligible investors (existing shareholders / rights acquired through renunciation).
What is the offer price of rights issue?
The offer price is fixed by the company in consultation with lead managers of the issue to raise funds based on their requirement. The shareholders are eligible to apply for shares at the offer price fixed by the company during the issue period as per the ratio fixed.
What is rights renunciation?
Rights Renunciation is a process in which an existing shareholder who has the rights entitlement can sell or transfer their entitlement to another either through the market or off-market.
What is the last date for on market renunciation?
The last date for on market renunciation is the date by which an existing holder of rights entitlement can sell the instrument through stock exchanges (on market). After this date, the instrument will not trade in the exchange.
What is the closing date?
The closing date is the date on which the rights issue closes for subscription for all investors. The rights entitlement if not used by the closing date expires and cannot be used or renounced after this date.
The investor has an option to apply for all their entitlement in the rights issue or can apply partly and renounce the balance to others. The investor can also apply for additional shares, higher than their entitlement by paying additional money. If an investor applies for additional shares, the allotment is done on proportionate basis based on the available shares beyond the eligibility. The available shares is the number of shares where existing investors didn't apply and available for allocation to other investors who have applied for more than their eligibility.
If an investor sells his rights entitlement shares and applies for additional shares over and above his entitlement, he will not be allotted any additional shares. This rule is also applicable when an investor acquires rights entitlement shares from market and applies for additional shares exceeding the entitlement.