What is Rights Entitlement of shares? How investors can benefit or lose money; all you need to know

Rights Entitlements of shares, the relatively new entrant in the Indian stock market, recently made news when India’s largest brokerage firm Zerodha reported that its customers lost Rs 10 crore in expired Rights Entitlements. Rights Entitlements is a recent concept, having been introduced in India’s share markets only in May last year 2020 with RIL’s mega Rs 53,125 crore rights issue.

Rights Entitlement is issued to shareholders by a company launching rights issue, giving them the right to subscribe the issue, or to sell it to other willing investors. Rights Entitlement (RE) are issued in a manner similar to the rights issue, in the same ratio, to the shareholders as on the record date.

According to the capital markets regulator SEBI, a shareholder may choose not to subscribe to the rights issue and let the right lapse. Or, the shareholder may trade the entitlement in favour of another person for a price. REs that are neither subscribed nor renounced before the issue closing date gets lapsed at the closure of the issue.

How people lose money in REs

Rights Entitlements are credited in the demat accounts of eligible shareholders of a company going through a rights issue. Investors who do not wish to apply for the rights issue have the option to sell their REs to other investors wanting to buy discounted shares in the corresponding rights issue. “People can lose money in Rights Entitlements in two ways: Firstly, when the eligible shareholder leave the Rights Entitlement without applying for the rights issue; and secondly, when investors buy the Rights Entitlements from the eligible shareholders during trading but not apply for the rights issue before the deadline ends for application,” Ravi Singh, Vice President and Head of Research, Karvy Group, told The Outlooker Online.

The mechanics behind the rights issue offer is that only those who own the shares as on the record date are eligible to subscribe to the proposed rights issue. “Any investor who has Rights Entitlements (REs) forgets or does not want to apply for the rights shares, loses the value of their REs,” Mohit Mehra from Zerodha told The Outlooker Online. REs are traded for a brief window on the stock exchange before they lapse. In case a shareholder doesn’t want to apply for the rights issue shares, Mehra advises to sell REs during this RE trading period. “In a rights issue, the benefit of such losses goes to an investor who may have applied for more rights shares than the number of REs they hold in their demat account,” Mehra added.

How to calculate REs value?

The value of the RE shares is more or less close to the spread between the company’s share price and the offer price of the rights issue. For example if a share price of company A is trading at Rs 150 and it goes for rights issue at Rs 125, the rights entitlement price is Rs 25 with a multiple of the minimum lot size. In case of RIL RE, a rights share was offered at Rs 1,257 and the market price of RIL during that time was Rs 1,437 per share. This means the value of RE was Rs 180.

RIL’s rights issue

Reliance Industries Ltd launched India’s biggest-ever rights issue worth Rs 53,125 crore in May 2020. According to the payment structure proposed by Reliance Industries Ltd for the rights issue, those who subscribed had to only pay 25 per cent of the price at the time of subscription and the remaining in two installments in May 2021 and November 2021. It offered RE shares to existing investors in the ratio of 1:15 at a price of Rs 1,257 per share. Following the RIL’s rights issue, over 25 companies have come up with rights issues since May 2020. It may be noted that trading in RE begins on the date of opening of the issue and closes at least four days prior to closure of the issue, so that eligible shareholders are finalised.

(The views in this story are expressed by the respective experts of research and brokerage firm. The Outlooker Online does not bear any responsibility for their advice. Please consult your investment advisor before investing.)