Rights Issue

• 12 Jun 2020

Why in News

Recent reports suggest that several companies, including Mahindra finance, Tata Power, Shriram Transport Finance among others are planning to raise funds through “rights issue” amidst the Covid-19 pandemic.

Key Points

• Reason:
  
  • Recently, Reliance Industries Limited (RIL) has concluded its rights issue and raised a total of Rs. 53,124 crore and witnessed an oversubscription of 1.59 times.
    
    • RIL’s Rights Issue is India's largest rights issue.
  • The successful rights issue of RIL and the big demand (oversubscription) shows that there is a huge demand in the market for the shares of companies with strong credentials at a good price.
• Definition:
  
  • A rights issue is a mechanism by which companies can raise additional capital from existing shareholders.
  • It is different from public issue (Initial Public Offer) and private placement.
• Advantages:
  
  • A company would offer a rights issue in order to raise capital which can be used to clear its debt obligations, acquire assets, or facilitate expansion without having to take out a loan from a bank.
  • It is a more efficient mechanism of raising capital. Under it, there is no requirement of shareholders’ meeting and an approval from the board of directors is sufficient and adequate.
  • Therefore, the turnaround time for raising this capital is short and is much suited for the current situation (Covid-19 pandemic).
• Disadvantages:
  
  • Raising funds through the right issue might create pressure on the company.
  • Value of each share may get diluted.
  • If the share price decreases post rights issue then investors may lose the holding value.
    
    • Holding value is an indicator of an asset that someone has in his/her portfolio. It is a value which sums the impacts of all the dividends that would be given to the holder in the future, to help them estimate a price to sell or buy assets.
  • Stock exchanges put a restriction on the amount on which a company can raise via the right issue.
• Reforms Under Rights Issue:
  
  • The Securities and Exchange Board of India (SEBI) has provided some permanent reforms in the rights issue, it has also provided some temporary relaxations in the wake of Covid-19 pandemic.
  • Permanent Reforms: In November 2019, SEBI streamlined the rights issue process and the timelines for completion was significantly reduced from T+55 days to T+31 days — a 40% cut in the time.
    
    • The ‘T’ stands for transaction date, which is the day the transaction takes place.
    • It has also reduced the notice period of rights issue to at least 3 working days from 7 days earlier.
  • Temporary relaxations: SEBI relaxed certain guidelines for right issues that open on or before 31^st March, 2021.
    
    • It reduced the eligibility requirement of average market capitalisation of public shareholding from Rs. 250 crore to Rs. 100 crore for a fast track rights issuance.
      
      • Market capitalisation is the value of a company that is traded on the stock market. It is calculated by multiplying the total number of shares by the present share price.
    • It reduced the minimum subscription requirement from 90% to 75% of the issue size.
    • Listed entities raising funds upto Rs. 25 crores (erstwhile limit was Rs. 10 crores) through a rights issue are now not required to file draft offer documents with SEBI.
      
      • Listed Entity means an entity which is listed on a recognised stock exchange(s).

Source: IE