After the implementation of the SEBI circular SEBI/HO/CFD/DIL2/CIR/P/2020/13 dated 22/01/2020 for Streamlining the Process of Rights Issue the concept of dematerialized Rights Entitlements (RE’s) came into force. While the Rights issue is not a new process but the trading in RE’s is something unheard of by the Investors before. RE trades in the stock market like any other security in a separate ISIN (distinct from the Equity ISIN of the company with the initials RE along with the Security name) during the period of Issue. An investor can buy sell such RE either in whole or in part giving access to the paper-less activity. Earlier an Application form was the sole relevant document to apply for the Rights issue or renounce the Right received in the issue. Now the Applications can be applied via ASBA mode i.e. through Self-Certified Syndicate Banks (SCSB) using the net banking facility or physically submitting the Application form to the collecting branch in case no online facility is provided by the particular Bank where the investor has a Bank Account. Another option is using R-WAP (Registrar web-based application platform) facility hosted by Issuer Company or Registrar on their website. Cheques and demand drafts for payment have become redundant in the current application method.
Most of the sources explain the process of the Rights issue from the company’s perspective-Timelines for documentation and approval for but the accurate information for an investor in simple language is scarce to find. After practically working on the Rights Issue and catering to the grievances of the Investors, it is easy to conclude that the Investors have minimal awareness about the process and often face hassles due to the lack of knowledge or understanding about major aspects involved.
Here are some points to remember by potential investors/shareholders applying for Rights issue:
- Rights entitlement or RE is mere an option just like a gift card with a validity period. The equity shareholder of the issuer company wins this card while potential investors purchase this card from the stock market. In both, situations application submission is mandatory otherwise the offer will lapse. Carefully read the Letter of offer for opening-closing dates of Rights Issue, the last date for market renunciation (settlement of T+2 trades before closing), Application amount to paid (full payment in an application or in calls as provided).
- There are two options for payment of application money-ASBA facility blocks the requisite application amount from the investor’s Bank account, unblocked if no allotment is made, and debited if the allotment is made while R-WAP deducts the amount of application, in case of rejection such amount will be refunded later. An investor must consider the option accordingly.
- RE ISIN and equity ISIN are different, if you purchase RE you will check the price of the RE ISIN, if you do not wish to apply for the issue you may sell the RE in the stock market (Applicable tax will be similar to that of Sale of Shares) and earn profit without any further payment. If you purchase the RE from the market and apply for the Rights issue, payment is made at two levels (RE purchase price+ Application amount). Once the issue is closed, RE ISIN will be reflected as suspended and Equity ISIN is applicable on the allotted shares. For party paid-up shares a New ISIN (distinct from equity ISIN and Rights issue ISIN with initials PP) will be applicable till all the calls are not made.
- Shareholders must have shares of the Issuer Company on the Record date to receive the RE; if shares are not in the Folio/Demat account on such date, they are not eligible to receive the RE from the company.
- RE must be in the Investors Demat account on the closing date of the issue i.e. make sure to check the Demat account statement for receipt of RE before applying for the Issue otherwise your application is subject to rejection. In case of RE purchased from the stock market or off-market transfer and not reflected in the Demat account, contact the concerned broker of the Demat account.
- Letter of offer states specific conditions for foreign investors/NRI. Read the offer document to check the eligibility before applying.
- An investor should have a Demat account to apply for the Rights issue, in case the shareholder held shares in the Issuer company in physical form, he needs to inform the issuer company/Registrar of the Demat account details for credit of RE and further credit of shares allotted in the rights issue.
- An investor may apply for additional shares but the final allotment is based on the Basis of allotment. An important point to note here is that if the Investor Renounced his RE in full or part he cannot apply for additional shares.
- Investors with zero entitlement are given preferential consideration for the Allotment of one additional Rights Equity Share if they apply for additional shares subject to the availability of shares. Read the offer document to interpret the same.
- Once the offer is closed Registrar along with the company and Merchant Banker will prepare the Basis of allotment along with the completion of listing and trading formalities. Successful allottees will receive intimation of allotment on their registered E-mail/Address in their Demat account.
- Offer-related documents are hosted at Issuer Company’s website, Registrar website, and stock exchanges. Normally the Equity Shareholders of the company receive the offer documents via intimation on registered E-mail/Address. Renouncee can infer the documents from the mentioned websites.
- The investor must have the Demat account active at the time of the entire Rights Issue activity. If the Demat account is suspended, frozen or under pledge, allotment will be transferred to the Unclaimed suspense account.
- At the time of applying, check the Demat account number (16 digits DP ID and Client ID), PAN particularly. Incorrect/incomplete details in the Application form are subject to rejection. Further, only one application is accepted from a unique Demat account.
- The Demat account of the investor should be updated with the latest information for seamless correspondence. The name of the shareholder in the Demat account should match with the name in the name in Folio where the Demat account is provided against physical shares held.
Once the above points are acknowledged, Investors will not be misled and heavy losses can be mitigated.