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. This article explains how to apply for rights issue and how to claim rights issue. 

Steps involved in Applying 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 generally involves the following steps: 

1. Receive Communication from the Company: All the eligible shareholders will receive an intimation from the company or registrar detailing the rights issue, along with an application form or an online application link. 
2. Check Rights Entitlement (RE): Traders need to review the email or Demat account to confirm the credit of Rights Entitlements (REs), which indicate their eligibility and the number of shares they can apply for. 
3. Decide Whether to Subscribe or Sell REs: Shareholders have the right to either subscribe to the rights issue, renounce or sell their REs in the secondary market. This allows them to lapse the RE if they choose not to participate. 
4. Submit the Application: One can complete the application using the Application Supported by Blocked Amount (ASBA) facility through their bank or the online platform provided by the registrar, entering details such as their Demat account, the number of shares applied for, and payment information. 
5. Make Payment: Before applying, it is important to make sure there are sufficient funds available in the bank account, as the application amount will be blocked until allotment. 
6. Wait for Allotment and Credit of Shares: After the issue closes, shares are allotted and credited to the Demat account, while any unutilised funds are unblocked. 

After understanding how to apply for rights issue online, the article further explains how to apply for rights issue through ASBA.  

Methods to Apply for Rights Issue 

Investors can apply for a rights issue through multiple methods. The stepwise process for each option is explained below: 

ASBA / Net Banking Process 

Step 1: Log in to the respective bank’s net banking account that supports the ASBA facility. 

Step 2: Select the Rights Issue option under the IPO/Issue Services section. 

Step 3: Choose the relevant company rights issue from the list. 

Step 4: Enter the Demat account details and the number of rights shares to apply for. 

Step 5: Submit the application; the application amount will be blocked in the bank account until allotment. 

Via Registrar and Transfer Agent (RTA) 

Step 1: Visit the official website of the company’s Registrar and Transfer Agent (RTA). 

Step 2: Access the rights issue application section using the PAN, Demat account details, or application number. 

Step 3: Fill in the required details, including the number of shares applied for. 

Step 4: Complete the payment using the available online payment modes. 

Step 5: Submit the application and retain the acknowledgement for reference. 

Through Demat / Trading Account Platform 

Step 1: Log in to the broker’s trading or Demat account platform. 

Step 2: Navigate to the corporate actions or rights issue section. 

Step 3: Select the applicable rights issue and verify your Rights Entitlement (RE). 

Step 4: Apply for the issue by confirming quantity and payment details. 

After understanding how to apply for rights issue of shares, the article further explains how rights issues work.  

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. 

How Do Rights Issues Work? 

As an existing shareholder of ABC Company, they are entitled to participate in its rights issue based on their current holdings. For instance, if they hold 100 shares, the company's offering of 30 additional shares per 100 held enables them 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 the shareholding is 200 shares, they 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 their Demat account, enabling them 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, one can retain the option to sell their entitlement, potentially realising gains. Therefore, exercising informed judgment and conducting due diligence is crucial before committing capital to a rights issue. 

Conclusion 

Understanding the rights issue process helps shareholders make informed decisions, whether to subscribe, renounce, or sell their entitlements based on their investment strategy. With the right tools and real-time access, managing such corporate actions becomes seamless through an online trading app, enabling investors to act quickly and confidently in the share market.