How to Apply for Rights Issue

How to Apply for Rights Issue

Rights issue is an offering by a company to its current shareholders, allowing them the opportunity to purchase additional shares at a discounted price based on their current holdings. Participation in a rights issue is optional for shareholders, who have the choice to apply for the new shares. This initiative provides shareholders with the flexibility to increase their investment in the company under favorable terms. 

Why Does a Company Announce Rights Issue?

Companies typically announce rights issues primarily to raise additional capital. Additionally, such announcements may occur in the context of mergers or acquisitions, or to address share price dilution and encourage greater shareholder participation.

Unlike initial public offerings (IPOs) or follow-on public offerings (FPOs), which can be relatively costly, rights issues allow companies to raise funds directly from their current shareholders, making it a preferred method for meeting capital needs.

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Table of Content

  1. Why Does a Company Announce Rights Issue?
  2. How to Apply for a Rights Issue?
  3. How Do Rights Issues Work?
  4. Should You Apply for a Rights Issue? 

How to Apply for a Rights Issue?

The company will distribute a form to each eligible shareholder for participation in the rights issue, which can be completed either online or offline.

Shareholders may also receive an email notification containing Rights Entitlements (REs), temporary Demat securities that confirm their eligibility to apply for the rights issue. Shareholders who choose not to subscribe to the rights issue have the option to sell their REs to other investors in the secondary market.

Applying for a rights issue typically involves the following steps:

Receipt of Communication: As a shareholder, you will receive a communication from the company detailing the rights issue, along with the necessary application form or link to apply online.

Review of Rights Entitlement (RE): Check your email or Demat account for the Rights Entitlement (RE) notification, which confirms your eligibility to participate in the rights issue based on your shareholding.

Decision to Apply: Decide whether you wish to subscribe to the rights issue. Consider factors such as the offer price, your current shareholding, and the company's prospects.

Fill Out Application Form: Complete the application form provided by the company. This form will require details such as your Demat account information, the number of rights shares you wish to subscribe to, and the payment method.

Payment: Make the payment for the rights shares as per the terms specified in the rights issue communication. This could involve online payment through net banking, UPI, or submitting a cheque/DD if applying offline.

Submission of Application: Submit the completed application form and payment to the designated bank or registrar as instructed by the company within the specified timeframe.

Confirmation: After processing your application and payment, you will receive a confirmation of your allotment of rights shares. This confirmation will also outline any additional steps or timelines for issuing shares.

Take a Note

Once your rights issue order is successfully placed, your bank account will temporarily reserve the corresponding amount. This reserved amount cannot be utilized for other transactions, ensuring its safety and earmarked use for the rights issue application.

If you are not allotted the requested shares, the blocked amount will be released, enabling you to withdraw it as needed. Planning your liquidity requirements accordingly is advisable, considering this temporary hold on the funds during the rights issue process.

How Do Rights Issues Work?

As an existing shareholder of ABC Company, you are entitled to participate in its rights issue based on your current holdings. For instance, if you hold 100 shares, the company's offering of 30 additional shares per 100 held enables you to apply for 30 shares at a discounted price of Rs 20 per share. Given the current market price of Rs 50 per share, this represents an opportunity to acquire additional shares at a significant discount.

In the scenario where your shareholding is 200 shares, you would be eligible to apply for 60 shares in the rights issue under the same terms. This provision enables shareholders to increase their holdings in the company at favorable terms, thereby potentially benefiting from future growth opportunities.

Rights Entitlement represents a temporary allocation of ABC Company shares credited to your demat account, enabling you to either apply for or trade these entitled shares. It is important to note that receiving Rights Entitlement does not obligate shareholders to subscribe to the rights issue; they have the flexibility to sell their rights on the market if they choose to do so.

Should You Apply for a Rights Issue? 

While rights issues present potential benefits, caution is advisable when considering participation. There are several cautionary signs to watch for; for example, the company's financial health may not be robust enough to support a public offering, or it might be facing liquidity challenges necessitating debt repayment.

Despite the allure of discounted shares, investing without thorough research can be imprudent. While a rights issue can offer advantageous terms, it may also signal financial strain within the company, prompting a rush for funding.

On the contrary, for investors who have observed consistent dividend payouts and sustained high stock prices, rights issues present an opportune moment to increase their holdings.

Ultimately, as a shareholder, you retain the option to sell your entitlement, potentially realizing gains. Therefore, exercising informed judgment and conducting due diligence is crucial before committing capital to a rights issue.

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FAQs on how to apply for rights issue

Yes, rights issues can typically be applied for online through designated platforms or portals.

Rights issue applications must typically be submitted through banks or financial institutions specified by the company issuing the rights.

To apply for an Application Supported by Blocked Amount (ASBA) rights issue, submit the application form through a bank offering ASBA services, ensuring the required funds are blocked until allotment.

Shareholders need to pay for the rights issue shares they subscribe to, typically at a specified discounted price per share.

Rights issue typically take several weeks from announcement to completion, depending on regulatory approvals and shareholder response timelines.

Participation in a rights issue is optional for shareholders.

To apply for a rights issue offline, fill out the physical application form provided by the company or its registrar and submit it along with the necessary payment to the designated bank or registrar.