Understanding a rights issue involves more than just getting shares at a discounted rate; it's about mastering the key terms that can influence your investment strategy. Concepts like Rights Entitlement (RE), record date, renunciation period, and call money play crucial roles in determining your subscription capabilities and flexibility.
Rights Entitlement (RE)
Rights Entitlement (RE) isn't the same as a share. It's a temporary credit that shows up in a shareholder's demat account when a company announces a rights issue. These REs give shareholders the option (not the obligation) to buy additional shares at a discounted rate. Shareholders receive these entitlements in proportion to their holdings as of the record date.
For example, if a company offers a rights issue with a ratio of 1:4, you’d get 1 Rights Entitlement for every 4 shares you own. Shareholders can either use these REs to apply for additional shares or sell them to another investor if the issue is renounceable. Remember, Rights Entitlements are temporary and expire once the rights issue closes if not used or sold. They don't grant any ownership in the company until converted into shares.
Record Date for Rights Issue
The record date acts as a cut-off point to determine which shareholders are eligible for Rights Entitlements (REs). Only those who hold shares on the record date will receive REs. The company announces this date beforehand through the Letter of Offer and stock exchange notifications.
For instance, if the record date is set for August 10th, you must hold the shares in your demat account on or before this date to be eligible. If you sell your shares before the record date, you won’t qualify for the REs, even if you initially bought the shares earlier.
Rights Entitlement Credit Date
The Rights Entitlement Credit Date is when the REs, which are temporary credits rather than shares, appear in the eligible shareholders’ demat accounts. This usually occurs a day or a few days before the rights issue officially opens. In your demat account, these REs will appear under a separate ISIN, such as ABC-RE.
These REs provide the right to apply for new shares at the issue price or to sell/transfer them if the issue is renounceable. However, they don't represent ownership in the company until you subscribe to the shares and they are allotted to you.
Rights Shares Credit Date
The "credit date" for rights shares refers to the day when the newly allotted shares are credited to a shareholder's demat account, typically after the rights issue closes. This happens once the company completes the allotment and informs the depository.
Renunciation Period
The Renunciation Period is the timeframe during which eligible shareholders can sell or transfer their Rights Entitlements (REs) to another investor. This period starts when the rights issue opens and ends a few days before the closing date, allowing buyers time to apply for the shares.
Renunciation can occur in two ways:
- On-Market Renunciation: Selling REs through the stock exchange, similar to trading regular shares.
- Off-Market Renunciation: Privately transferring REs to another person (like a friend or relative) through your Depository Participant (DP).
The entitlement ratio applies to renunciation as well, you can sell or transfer all or part of the REs credited in that ratio. Once the renunciation period ends, REs can no longer be traded or transferred.
Terms of Payment for Rights Issue
Companies can collect payment for the rights issue in the following ways:
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Full Payment at Application: Shareholders pay the entire issue price upfront. For example, if the issue price is ₹1.75 per share, you must pay ₹1.75 at the time of application.
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On Call Money Basis: Shareholders pay part of the issue price at application and the remaining balance later, when the company calls for it. For example, if the issue price is ₹8.50, you might pay ₹4.25 at application and the other ₹4.25 later when requested by the company.
The company must collect all outstanding call money within 12 months from the date of allotment.
Letter of Offer
The Letter of Offer (LOF) is an official document filed with SEBI and sent to shareholders. It outlines essential details such as:
- The purpose of the issue
- Record date and entitlement ratio
- Issue price and payment terms
- Timelines and procedures
- Risk factors and financial details
Investors should thoroughly read and understand the LOF before applying for the rights issue.
Ratio of Rights Issue
The rights issue ratio indicates how many Rights Entitlements (REs) a shareholder receives based on their current shareholding. Each RE allows the shareholder to apply for one new share at the issue price.
For example, a rights issue ratio of 2:5 means a shareholder will receive 2 REs for every 5 shares they hold, allowing them to apply for 2 new shares at the issue price. The ratio essentially shows how many Rights Entitlements are credited to a shareholder’s demat account, reflecting the number of new shares they can subscribe to during the rights issue.
Rights Issue Price
The rights issue price is the rate at which the company offers new shares to eligible shareholders. Typically, this price is lower than the current market price, making it an attractive opportunity for existing investors.
Rights Issue Period
The rights issue period is the time frame during which investors can apply for rights shares or trade their REs. A rights issue stays open for a minimum of 7 days and a maximum of 30 days. This is the period when eligible shareholders can apply for shares, sell, or renounce their Rights Entitlements (REs).
It's crucial to act on your REs within this window. Once the issue closes, any unused or unsold REs will expire and become worthless.
Rights Issue Allotment
After the rights issue closes, the company allots shares to those who applied. The new shares are then credited to the investors’ demat accounts, and trading usually begins shortly after allotment.
Date of Allotment
The "Date of Allotment" for a rights issue is when the company officially allocates the new shares to shareholders who applied. The company sets this date and typically includes it in the offer document or timetable for the rights issue.
- This is the date when the allotment of new shares is considered to have occurred.
- The deemed date of allotment is after the issue closes, when the rights shares are officially allotted and credited to shareholders' accounts.
- You can find the specific date of allotment in the issue's official documents, often referred to as the "Letter of Offer," and in the issue's timetable published on financial news websites or the company's own site.
Key Takeaways
- REs are not shares; they are temporary credits giving the right to apply for shares.
- The Record Date determines who gets REs.
- The RE Credit Date is when REs become visible in your demat account.
- The Renunciation Period allows REs to be sold or transferred.
- Payment terms can be complete or in parts (call money).
- The Letter of Offer is the official document with all details.
- The Issue Ratio shows how many REs are credited per share held.
- The Issue Period defines when to act, and allotment finalizes share ownership.