Zerodha users lose Rs 10 cr in lapsed Rights Entitlements since RIL issue; brokerage issues warning

Since May 2020, when Reliance Industries Ltd rights issue opened for subscription, customers of India’s largest brokerage firm Zerodha have lost Rs 10 crore in expired Rights Entitlements by not applying for shares. While most of this investor money was lost on account of the RIL rights issue, some was lost in other issues as well, Zerodha Founder and CEO Nithin Kamath said. “Most of this is Reliance Industries given the size of its rights issue but it includes the amount our clients lost for all rights issues since May 2020,” Nithin Kamath told The Outlooker Online.

Earlier this week, Nithin Kamath took to Twitter to inform investors that his new-age brokerage will now warn investors, who wish to apply for Rights Entitlements (RE) on the platform, of the risks involved. “Many retail investors buy Rights Entitlements without knowing that the value of REs will be zero if they don’t apply,” Nithin Kamath said on Twitter. “Since May 2020 our clients have lost ~Rs 10 crore by buying Rights entitlements & not applying. We now have a nudge to warn customers,” he added.

Original allottees and secondary buyers, both lose money

Rights Entitlements are credited in the Demat accounts of eligible shareholders of a company going through a rights issue. Beneficiaries who do not wish to apply for the rights issue can sell their REs to other investors wanting to buy discounted shares in the corresponding rights issue. Reliance Industries’ Rs 53,000-crore rights issue in May 2020 was the first in Indian share markets where shareholders were allowed to trade REs.

The Rs 10 crore that Zerodha users have so far lost includes both: i) investors buying REs from eligible shareholders, but not applying for shares within the deadline, and ii) eligible shareholders neither applying for the rights issues using their REs, nor selling their REs in the stock market, Nithin Kamath told The Outlooker Online. 

What are Rights Entitlements?

Rights Entitlements give an option to the holders to buy shares of the company at discounted prices, as agreed in the rights issue offer. REs are only credited in the Demat accounts of those customers who are eligible, according to the offer, and are issued in a specific ratio. In the Reliance Industries rights issue, the ratio was declared at 1:15. This meant that the investors would be issued one RE for every 15 shares owned. Capital markets regulator SEBI in January 2020 announced that REs will be tradable on the stock exchanges.

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Eligible shareholders receive REs for no additional cost. “No money is charged to the shareholder receiving an entitlement in their account unless they subscribe to the issue at which point the process is similar to an IPO,” said Yug Tibrewal, Research Analyst, Choice Broking.

“The price of the RE is determined by the market based on the discount from the current market price of the security,” he added. For example, if a share is trading at Rs 10, and the company has offered stocks at a discounted price of Rs 8 in the rights issue, then the RE would be worth about Rs 2, or more or less depending on the demand.

REs continue to be traded till the rights issue is open. “Trading in RE shall begin on the date of opening of the issue and close at least four days prior to closure of the issue,” Makarand Joshi, partner, MMJC and Associates LLP – a corporate compliance – firm told The Outlooker Online. If left unused, the RE lapses, according to SEBI norms.

What happens to unused REs

“If investors fail to exercise RE then they will lose the right to buy rights shares and consequently will lose the value at which they could have bought rights shares at a discounted price,” Makarand Joshi said. “If the REs are neither subscribed nor renounced then those right shares will never come into existence and accordingly market capitalisation will not increase to that extent.”

Further, the lapsed REs also work to the benefit of investors who want to apply for more shares than their RE credits. The lapsed REs are redistributed among the oversubscription to the rights issue, enabling investors to buy more shares than their RE holdings.