What is Right Issue? How To Apply For Rights Issue? Benefits & Drawbacks

A right issue is a way by which a listed company can raise additional capital from the existing shareholders without going to the public. In the right issue, the board approves issuance of the equity shares on rights basis to the eligible equity holders of the company.
It means if you are a shareholder of the company on the record date of an issue then you can participate in the rights issues. In simple words, rights are merely shares only.

What is the Difference Between Right Issue and IPO?

Right issues are only offered to the shareholder of the company only whereas IPO’s for the general public and anyone can apply.

What is the Price Structures of Shares Offer in Right Issue?

The price of the right issue depends on the closing price of the share on its record date. It is always issued at discount price or less than the prevailing market price from the last close. For ex: If x company share price is at Rs 100 and x company issues the right issue at the discount of 10 per cent then the issue will be price at Rs 90.
Shareholders can subscribe according to the number of shares in proportion to existing shares of the company in their demant account on the record date.

Who can Participate in the Rights Issue?

Anyone can participate in Rights Issue who owns the share of the company on the record date. Promoters and Retail Investors both can subscribe to the full extent of their aggregate rights entitlement (i.e., the shares at the discounted price) in the rights issue.

Why Company Issue Rights Issue?

Company issue right to raise funds from the market for a number of reasons such as to be debt-free, for expansion and growth of the company, large takeover, etc.
Benefits:

  • Existing shareholders can apply for fresh shares at a discounted price.
  • Raise additional capital without going to the public
  • Low Debt to Equity ratio

Disadvantages:

  • Affects equity capital and market capitalization
  • Dilute equity
  • Less Earning Per Share (EPS)

Options Available to Shareholders:

1. Apply
2. Apply and Sell
3. Lapse
Shareholders can either apply for the share or if they don’t want to exercise the right of buying additional shares then they can sell the rights as the rights are usually tradable. Alternatively, shareholders can also let the right issue to lapse.

How do you apply for a rights issue at Zerodha?

The process to apply for a rights issue is through ASBA (Applications Supported by Blocked Amount). If your bank allows you to apply online just like an IPO.
If not then you would receive a courier of the Composite Application Form (CAF)from Registrar and Transfer Agent (RTA) of the company. Then you have to fill the form and submit it at a Self Certified Syndicate Banks (SCSBs) Branch.
Once successfully form is submitted and allotment of issue completed, the stock will be credited to your DEMAT account within 15 to 20 days from the book closure date.

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