Introduction
A Right Issue of Shares is a corporate action where the company invites its existing shareholders to subscribe to new shares at an attractive price, which are given to them on proportionate basis. The method gives the current shareholders the option, but not obligation to buy a proportionate number of new shares at an agreed price (usually lower than market) within a certain time limit. In this article, we will discuss Right Issue in detail discussing Meaning of right issue, Significance of the process to follow while putting through rights offer Advantages and Disadvantages.
Understanding Right Issues
Definition and Concept
A right issue (or rights offering) is an invitation to existing shareholders which let them buy additional shares from the company before they get offered to people outside. These shares are generally traded below the current market price, so this looks like an attractive offer to shareholders.
Types of Right Issues
The rights to surrender: these are right which you can exchange on the financial exchange The investors who do not want to exercise their rights, they can sell them off in Open Market.
Non-renounceable Rights: These rights are non-tradables. Existing shareholders are left with no alternative other than for them to take up the additional rights or allow these rights pass.
The Process of a Right Issue
Step-by-Step Process
Board Approval: The company first has to get approval from its board of directors for a right issue.
Shareholder Approval: In certain jurisdictions, approval of shareholders may be needed usually at EGM.
Filing with Regulatory Authorities: The Company has to file the right issue proposal before its regulatory authorities like SEBI in India.
Record Date: This date is set by the company, on which date a shareholder must be registered in order to receive rights.
Offer Document: Offer document is issued by the company which contains all the information about right issue of shares including price, ratio and period to subscribe.
Exercise Period: The term during which the rights to shares can be exercised by shareholders and new ownership is obtained through subscription.
Allotment and Listing: After the Subscription period is over, company allot new shares to successful applicants and then it lists those on stock exchange.
Significance of Right Issues
Capital Raising
A right issue is an important tool for a company to raise earmarked fund and without further leveraging. The capital can be used to expand operations or invest in new projects, pay down debt with especially high interest rates (credit-card balances will nearly always fall under the “expensive” category) or shore up working-capital gaps.
Favoring Existing Shareholders
By offering shares to current owners, it maintains the existing ownership of control without dilution.
Advantages of Right Issues
For the Company
Economic financing: Equity right issues are usually less expensive than a public offering because they have 1 lower underwriting and administrative cost.
Better Way of Raising Capital: Right Issue process is quicker in compared to other method such that companies are able to raise desired funds fast.
Improve the balance sheet: Right issues can also help companies to improve their balance sheets, as by raising equity it could reduce its debt-equity ratio.
For Shareholders
Shareholders Discounted Shares: in this case shareholders are allowed to purchase more shares but and lower than the market price, which possibility of being gainful.
Non-Dilution of Ownership: Shareholders, choosing to exercise their rights can hold onto the same % ownership they had in a Co.
Flexibility: Shareholders are given a choice to either subscribe the new shares, sell their rights (in case of renounceable rights) or take no action.
Problem of Right Issues
For the Company
Market Perception: The announcement of a right issue can be seen as being unfavorable for the market and might result in a decrease of stock price.
Full Subscription Uncertainty: This places the company at risk of not achieving its capital raising target in case some shareholders do not take up their rights.
For Shareholders
Value dilution: If the shareholders do not subscribe to this right issue their value in terms will be diluted.
Capital Outlay: As part of purchasing a rights issue, shareholders have to spend quite some more capital in order the exercise their right; which would not be possible for all.
Examples of Right Issues
Case Study: Reliance Industries Ltd. (RIL)
India: Reliance does not intend to raise USD 7 billion from the right issue, but only INR 53,125 crore Considering any offer being made by an Indian company, this was probably the biggest right issue in India that time. The issue was priced at INR 1,257 per share which were below the market price of DLF stocks on that day. The company extended one share for every 15 shares held. The success of the right issue was evident from 1.59 times more application in subscription to that of actual size showing high investors’ confidence.
Case Study: Tata Motors
Right Issue In 2015, Tata Motors had come out with a right issue of INR 7500 crore. The company issued 1 Share for every Six shares held at a price of Rs.450 (at Discount to Market Price) The proceeds of the right issue were to be used for paring debt and expansion plans by the company. The issue was well received at a very high subscription level, signaling strong approval from shareholders.
Regulatory Framework
India
In India, the SEBI (Issue of Capital and Disclosure Requirements) Regulations Act 2018 regulates the process concerning Right issue. Key regulations include:
Eligibility: Criteria to determine eligibility for Buyback by a Company Listed on any registered Stock exchange moment it became unqualified that is all suspended companies in India and delisted corporations are tagged with exempt from the above said guidelines
Offer Document Filing: – The company shall file a draft offer document with SEBI and stock exchange.
Pricing: – The board of directors must set the issue price.
Subscription Period: – The subscription period should fall between 15 days to a maximum of 30.
Pre-emption: shareholders should have the right to renounce their pro-rata entitlement.
Strategic Considerations
When to opt for a Right Issue
Financial Health: The lower the risk for shareholders, and hence more positive response Ideal counter-parties Companies which are in good financial health and have identified a path to growth.
Market Conditions: – Favorable market conditions and investor sentiment are critical for the success of a right issue.
Use of Proceeds: Make sure to put across the message in a clear and transparent manner as where are you looking at using all of these funds, will enhance investor confidence.
Conclusion
Right issue of shares is thus a strategic weapon to let companies raise capital at one fell swoop besides offering benefits for existing shareholders. While it is not without its challenges, a right issue can heavily impact the financial standing of a company if executed wisely and lead to sustainable growth in the future. On the other hand, shareholders must consider terms and likely advantages before choosing to participate in a right issue. Like with any investment decision, you need to do your own research and take into account personal financial circumstances.
What is a right issue of shares?
Right Issue of Shares is the process through which a company raises additional capital by giving existing shareholders the right to buy further shares on discount A universal truth about Right Issue Java package, whenever an issue letter crosses your mail box or mailbox screaming that you have been offered some extra. This offer is made relevant to their current holding ratio
Can shareholders sell their rights?
Yes, the rights can be traded on a stock exchange by an existing shareholder. It also gives rights holders who do not want to participate in the new issue an exit option with at least some value.