Rights Issue of shares

Whenever a company makes a fresh issue of shares, it has an impact on the existing shareholders since their proportionate holding in the share capital of the company gets diluted. For example, a company may have 10 lac shares of Rs.10 each, amounting to an issued and paid-up capital of Rs. 1 crore. If it issues another 10 lac shares, to increase its capital, the proportion held by existing shareholders will come down by half, as the issued and paid-up capital has doubled. This is called as dilution of holdings. To prevent this, section 81 of the Company’s Act requires that a company which wants to raise more capital through an issue of shares must first offer them to the existing shareholders. Such an offer of shares is called a rights issue.

Stock recommendations by financial research house in India

Rights Issue of shares
Rights Issue of shares

The rights shares are offered to the existing investors in a proportion as approved by the board of a company. For example, the company may choose to issue rights at 1 for 1, to double its capital. This means each existing shareholders will get one equity share for every one equity share that they already hold. The issued and paid-up capital will double, but proportionate holdings will not change. The ratio of rights issues need not always be one. They can be 1:2, 2:3, and 2:5 and so on, depending on the decision of the board of the company. The various financial research house in India provide exorbitant stock recommendations for the well-being of the investors and traders in the market.

A rights issue of shares must follow all SEBI’s regulation on the issue of shares. A listed company making a rights issue shall fix a record date to determine the eligibility for the rights. The company must issue a letter of offer giving details of the issue including the purpose for which funds are being raised. The draft letter of offer must be filed with SEBI. An abridged letter of offer must be dispatched to all investors at least three days before the issue opens. Investors can also apply on a plain paper if they do not receive the application form. The rights issue is kept open for a period not less than 15 days and not exceeding 30 days during which investors subscribe to the shares. The rights entitlements are credited to the Demat account of the investor.

Investors can also choose to decline the offer or sell their entitlement to another as per the recommendations of their option tips provider. This is called renouncing the rights. Rights entitlements are traded on the stock exchange during the period. The entitlement will be traded distinct from the equity share of the company. The trading in the entitlement will cease before the period of the rights issue ends, which gives the investors who bought the entitlement the time to apply for the shares.

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