How to Apply for Right Issue Of Share

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The growing competition has obliged many companies to constantly raise capital to support their day-to-day operations. One of the common methods for businesses to raise financial capital is through Rights Issues. It involves issuing rights to existing shareholders to buy additional shares of a company at discounted prices. It is a cost-effective way of raising finances compared to Initial Public Offerings (IPOS) or Follow-on Public Offerings (FPOs).

This article will explain the process of buying rights issue shares.

How to Apply Right Issue

When a rights issue is implemented, eligible equity shareholders have several options -

Buy additional shares at a discounted price
Renounce their rights
Sell their rights to other investors in secondary stock markets
Let the rights lapse by taking no action by the specified date

The rights issue process starts when shareholders receive an email regarding their eligibility for Rights Entitlement (RE). If they do not want to exercise their rights, they can sell their RE on secondary markets.

For those who wish to apply for a Rights issue, they can do so via two methods available -

ASBA Process: If available, eligible shareholders can use the Applications Supported by Blocked Amount (ASBA) process via their bank accounts. In ASBA, the amount for the shares applied is blocked in the investor's bank account until the shares are allotted.
CAF Process: If not able to apply online, shareholders can request a Composite Application Form (CAF) from the company’s Registrar and Transfer Agent (RTA). Shareholders will receive the form via courier. They are required to fill out the form and submit it at a Self-Certified Syndicate Bank (SCSB) branch.

The following steps can help shareholders actively participate in a rights issue.

Procedure for Right Issue of Shares

The procedure of a rights issue is straightforward. Let’s understand it with an example:

Imagine you are an existing shareholder of an XYZ company. The company aims to reduce its debt and enhance operations, therefore, it launched a rights issue. Suppose the declared ratio of the rights issue is 10:3. It means for every 100 shares you own, you are entitled to apply for 30 additional shares. These additional shares might be available at a discounted rate of ₹20 per share, compared to the current market value of ₹50 per share.

To determine one’s entitlement and investment requirements, it is important to understand the rights issue calculation. The entitlement is temporary. It gets reflected as a credit in Demat accounts.

Rights Issue of Shares Calculation

Calculation of Rights Issue of Shares is a simple process. It follows as -

For example, a company announces a rights issue at the ratio 4:1, meaning for every four shares owned, shareholders are entitled to buy one additional share at a discount rate.

If the current market value of the shares is ₹1,280 per share and the company issues the share at the price of ₹1,000 per share, a shareholder holding approximately 2,000 units becomes entitled to purchase 500 extra stocks at a discounted rate.

As per the calculation of the right issues of shares, the shareholder can acquire 500 (2000 ÷ 4) valued at ₹5,00,000 (500 x ₹1,000 per share). After exercising their rights, their holdings will increase to 2,500 units, requiring an investment of ₹5,00,000. As a result, they will have total ownership of 2,500 shares.

The Objective of Right Issue

Companies often opt for rights issues for a variety of financial reasons. Following are some of the main objectives -

Raising Funds: Companies can raise capital faster through rights issues (equity financing) than debt funding methods, like debenture issuance.

Avoid Debt: Right issues come in handy if debt funding is not feasible and suitable.

Enhance Gearing Ratio: Companies can improve their gearing ratio using rights issues as it increases shares without adding more debt.

Secure Financial Position: Financially troubled companies can issue rights of shares to clear debt and enhance their financial position.

Advantages and Disadvantages of Applying for Right Issue

There are several advantages of a rights issue as it can be considered mutually beneficial. However, this way of raising money retains certain disadvantages as well, even though it is reasonable.

Advantages	Disadvantages
Shares are offered at a discounted price to existing shareholders	Shareholders who do not participate have their ownership diluted
Shareholders get an opportunity to raise their stake in the company	The announcement can cause abnormal market fluctuations
Reduces dependency on external funding as it allows to raise capital fast	Companies may not raise the desired amount of capital, causing financial strain
Enhances shareholders’ commitment to the company by allowing them to make additional investments	Possibility of a temporary drop in the market value
Rights issues are carried out quickly, enabling companies to capitalise on funding opportunities	Involves legal compliance, communication, and paperwork
Funds raised through rights issues can be used for debt reduction, growth capital, R&D, or acquisitions.	Negative perception could lead to doubts regarding the company’s financial health
Helps to avoid taking debt, improving financial health	Shares price for the existing shareholders could be lowered

Conclusion

Rights Issues present several attractive opportunities for both companies and shareholders. It even helps to preserve voting rights compared to an FPO (Follow-up Public Offerings). However, it is essential to be careful, especially if a company showcases signs of financial distress. Ensure thorough research and analysis to mitigate risks and raise capital efficiently.