Rights Issue Entitlement - Explained with Examples

Published on Sunday, August 30, 2020 by Chittorgarh.com Team | Modified on Tuesday, March 23, 2021

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Rights Issue Entitlement - Explained with Examples

A rights entitlement is an entitlement given to the eligible shareholders on a pro-rata basis to buy additional shares of the company at a discounted price.

Content:

  1. Rights entitlement meaning
  2. Rights entitlement renunciation
  3. Rights entitlement trading
  4. Rights entitlement share price
  5. Rights Entitlement SEBI
  6. Conclusion
  7. FAQs

Rights Entitlement Meaning

Rights entitlements (RE) are the shares offered to eligible shareholders in the ratio of their existing holdings.

The eligible shareholders are the ones who own the shares of the company as on a record date announced by the company.

Rights entitlement is a temporary credit of shares in the Demat account of the eligible shareholders which enables the shareholders to apply for the rights issue or transfer the rights entitlements to other interested investors. It is important to note that getting rights entitlement shares does not mean you have got the rights shares, you need to apply for rights shares based on entitlements received.

The rights entitlement ensures that you are entitled to apply for that many numbers of shares. The eligible shareholder can also apply for additional rights share over and above their RE. The allotment of such additional rights share will be based on the issue subscription and will not be guaranteed. A shareholder not willing to exercise his rights can ignore the RE received in their Demat account. Alternatively, the shareholder can transfer or sell his RE to other interested investors by participating in RE trading on the stock exchange or off-market.

Rights Entitlement Renunciation

The process of transfer or sale of rights entitlements to other investors is called renunciation of rights issue.

The person selling the RE is called the renouncer and the person buying the RE is called the renouncee.

A shareholder can either renounce his RE in full or part. However, in such a case, neither the renouncer nor a renouncee can apply for additional shares over and above the number of RE in their possession.

The rights entitlement renunciation can be done on-market by participating in RE trading through the stock exchange or off-market.

Rights Entitlement Trading

SEBI has now dematerialized the rights entitlements and has made it mandatory for the companies to credit the rights issue entitlement to the Demat account of the eligible shareholders.

The shareholders holding physical shares as on record date are required to provide the Demat details to the company not later than two days before the issue opening date failing which, the right entitlement shares will be held in Demat suspense escrow account. The physical shareholders are further given a final cut off to provide Demat details before the issue closing date failing which, the RE may lapse and such shareholders will neither be able to participate in RE trading nor will be able to apply for rights shares on time.

The rights issue is generally offered in proportion to the existing holding. Thus sometimes it may lead to fractional rights entitlement. In such cases of fractional entitlements, the fractional part is ignored and RE are credited by rounding down the quantity.

The rights entitlement platform allows the RE holders to transfer and renounce their rights to other interested investors for a price by participating in rights entitlement trading on a stock exchange. RE trading takes place in a similar way to equity trading barring few peculiarities.

Key characteristics of rights entitlement trading:

  • The RE trades with different ISIN, NSE symbol, and BSE scrip code.
  • The trading of RE commences with issue opening date and generally closes 3-4 working days before the issue closure date. This is to allow the buyers of RE sufficient time to apply for rights share before the issue closure date.
  • No intraday trading permitted in RE trading.
  • The settlement of RE happens on a T+2 (T being the trading day) basis.
  • On T+2, the depositories need to be instructed to transfer the RE from seller's (renouncer's) Demat account to buyer's (renouncee) Demat account on payment of consideration by the buyer to the seller. The settlement process in RE takes place just as in the case of equity trading.
  • Any shortages in RE shall be directly closed-out at the highest price prevailing across the Exchanges from the day of trading till the T+1 day or 20% above the settlement price of Rights Entitlement on the T+1 day, whichever is higher.
  • The seller of the RE is required to pay STT at the rate of 5% of the RE trade value.
  • The RE trading is allowed in the pre-open market session, normal session, block window, and post-market closing session.

The ISIN for right entitlement shares gets suspended on the exchange floor once the trading period of RE ends. The ISIN gets deactivated permanently in depository systems post the allotment of rights shares is completed. The allotment of rights share is done based on the applications received, rights entitlements Demat holder list, and the funding blocked.

Rights Entitlement Share Price

The rights entitlements price is based on the price of the equity stock and the price at which the rights issue is offered. The base price for the rights entitlement trading is calculated as the difference between these two prices. Once the base price is fixed, the further movement in pricing depends on the market sentiments and demand and supply of the RE.

Rights Entitlement Share price (Base price for the first day of trading) = Closing price of the stock on the previous day of issue opening date less Rights Issue Offer price.

Example: Say the rights issue of ABC company is being offered at Rs 250 and the issue opening date is 25th August 2020. In this case, first, we will have to look for the closing price of ABC on 24th August to arrive at the base price. Say the closing price of the stock is Rs 350. Thus, the base price for its RE trading will be set to Rs 100 (350-250), post which the price will keep fluctuating based on the demand and supply of the RE and other market forces.

Rights Entitlement SEBI

Earlier the rights issue process was very lengthy with applicants requiring to submit a Composite Application Form (CAF) physically to the registrar, company, or designated banks via registered post or physical delivery. In 2008, SEBI proposed the electronic rights issue process and E-trading of rights entitlements to streamline the rights issue process. In January 2020, SEBI introduced dematerialized rights entitlements and its trading on the stock exchange to make the rights issue process more efficient and effective.

Generally, the application to rights issues is required to be made through the ASBA facility. However, to ease the application process in these pandemic times, SEBI has allowed a temporary process to apply for rights issues online through Registrars Web-based Application Platform (R-WAP) using UPI facility or net banking. These actions from regulators to bring in more and more efficiency in the rights issue process is a signal for the companies to raise funds via rights issue rather than increasing the debt burden.

Conclusion

The dematerialized rights entitlement has completely transformed the obsolete, time consuming, physical rights issue process to a fast track, online mode bringing more transparency in the entire rights issue process. Earlier, the eligible shareholders not wanting to subscribe to their rights shares either had to let go of their rights or transfer the rights for free. However, with the introduction of trading of rights entitlement on the exchange floor provides a very good opportunity for the eligible holders to renounce their rights at a better price.

Learn more about Rights Issue

Frequently Asked Questions

  1. 1. What is rights entitlement?

    Rights entitlement is the credit of temporary shares in the Demat account of eligible shareholders that entitles the shareholders to apply for rights issue share at a discounted price within a specific period.

    A shareholder not wanting to exercise his rights to apply for rights can also renounce or transfer the entitlements to other interested investors through trading or off-market mode. In case, no action is taken by the required date, the rights entitlement lapses.

     

  2. 2. How many rights entitlements can I get?

    The rights entitlements are credited in the ratio of existing holdings as on a record date.

    The rights issue is offered in proportion to existing holdings based on which the right entitlements are credited. If the ratio in which the rights share are offered results in fractional rights entitlement, the fraction is ignored and the rights entitlement are credited applying rounding down logic.

    Let's take two scenarios to have a better idea of the number of rights entitlement one can expect considering a company announces to offer 2 rights shares for every 15 shares held.

    Scenario 1: If you hold 45 shares of the company as on record date, you will be eligible to get 6 shares as rights entitlement as per the ratio decided by the company.

     Scenario 2: If you hold 50 shares of the company as on record date, you will still be eligible to receive only 6 shares as your rights entitlement, since the fractional entitlement is ignored by rounding down to the nearest integer.

     

  3. 3. Can I apply for additional rights entitlement?

    The rights entitlement(RE) cannot be applied for. The RE gets credited to your account in the proportion of your holding in case you qualify as an eligible shareholder as on record date announced by the company.

    One can apply for additional rights share over and above their rights entitlement only when one has subscribed to their entitlements in full. A cannot apply for additional rights shares.

     

  4. 4. What are rights entitlement shares?

    The rights entitlements shares are the shares credited in the Demat account of eligible shareholders in the ratio of the existing holdings.

    These rights entitlement shares enable the shareholders to apply for new shares one is eligible for under the rights issue offer.

     

  5. 5. What is rights entitlement trading?

    The rights entitlement trading is a special trading platform of the stock exchange introduced by SEBI where one can sell their rights entitlement to other interested investors in case one is not willing to subscribe to their rights.

    The RE trading platform is aimed to bring in efficiency and transparency in the rights issue process. Moreover, it offers a better opportunity for the shareholders to sell their rights at a better price rather than let it lapse.

     

  6. 6. How can I sell my rights entitlements?

    The rights entitlement (RE) can be sold either by participating in rights entitlement trading on the stock exchange platform or by way of off-market transactions.

    The stock exchange trading can offer better prices depending on the demand and supply of RE in the market whereas in case of an off-market transaction the pricing will be decided by mutual consent.

     

  7. 7. What is renunciation of rights entitlement?

    The renunciation of rights entitlement is the process of transfer or selling the entitlements to another interested party in part or full when the shareholder is not willing to subscribe to his rights entitlements.

    The renunciation of RE can be done either via rights entitlement trading on the stock exchange or off-market renunciation.

    The benefit of renunciation is one can get a better price for their entitlements rather than giving it up as is. However, when one chooses to renounce his rights partly or fully, such shareholders cannot apply for any additional shares at a later stage.

     

  8. 8. Can I renounce rights post suspension of rights entitlement trading?

    The rights entitlements trading is allowed for a specific period on the stock exchange. Once the right entitlement trading is suspended, one can renounce their rights only by way of off-market renunciation.

    There is no time frame defined for off-market renunciation as is the case for rights entitlement trading. It can be done anytime from issue opening date till issue closure date. However, it should be done within a reasonable timeframe in such a way that the transfer is completed in such a manner that the Rights Entitlements are credited to the Demat account of the Renouncees on or before the Issue Closing Date.

     



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