Rights Entitlement (RE) gained immense popularity ever since Reliance Industries had credited the rights entitlement directly to the shareholders’ Demat account in May 2020. SEBI had already made buying and selling rights entitlement easy in electronic form via Demat account in January 2020. With everything going rapidly digital, this comes in handy for the shareholders who do not want to step out and submit the physical form. Read on to know more about the rights entitlement.
What is Rights Entitlement?
When companies need more capital, they often raise it through existing shareholders via Rights Issue. It gives existing shareholders the right to buy new shares in proportion to their current holdings. And rights entitlement is the number of shares you are entitled to in the rights issue. For instance, in the case of ABC company, you have 100 shares, and the rights issue ratio is 1 share for every 4 shares held. Hence, you can receive 25 shares which will be your rights entitlement.
As per the new guidelines, the RE is temporarily credited to the shareholders’ Demat account in proportion to the holdings of that company in your Demat account (as per Rights Ratio). Apart from this, a window opens in the secondary market where a shareholder can buy/sell RE.
Note: You should keep in mind that RE is temporary and until you apply and pay the requisite amount, rights shares won’t be credited to your Demat account
Why rights entitlement?
Direct credit of rights entitlement into existing shareholders’ account under the new process offers the following benefits:
- Removes the need to submit the form physically
- Shareholders can directly transfer their rights if they don’t want to buy the rights shares
- Brings transparency in the transfer of shares process
- Interested investors can buy rights shares from the secondary market
- Shareholders can know the value of the rights entitlement
How is it different from the rights issue?
A rights issue is a corporate action that a company takes to expand its business, increase its working capital, or clear its debts. But, rights entitlement is the shares offered in the ratio of the existing shares the shareholders hold.
How will RE be credited to your account?
Below are the 2 ways in which RE will be credited to your Demat account:
- If you hold shares of the company announcing Rights Issue, proportionate RE will be credited to your account
- If you don’t own shares of the company, you can buy RE in the secondary market when the window opens
Note: Please note that if you don’t act on your RE, they will get lapse after the due date
What options do you have in rights entitlement?
If you have received shares in your Demat account as rights entitlement, you have 3 options:
- Use your rights entitlement to buy and get the ownership of the shares.
- Transfer your rights entitlement in part or full by trading on the stock exchange or off-market to earn a profit (Renunciation of rights issue). If you are not entitled to rights shares, you can buy them in the secondary market when existing shareholders begin selling them.
- Do nothing to your rights entitlement and let the rights lapse.
You can select any path depending on the company’s future growth, your portfolio, the value of the rights shares, company overview, and other relevant information.
What will happen to RE if I haven’t participated in the Rights Issue?
In both the cases mentioned below, your RE will lapse after the offer closing date.
- You haven’t applied for Rights Issue
- You applied for Rights Issue but failed to pay the requisite amount
How can you apply/participate in the rights issue?
You can apply for the rights issue using either of the two methods mentioned below.
- Online ASBA : You can visit the website of the SCSBs* (Self-certified Syndicate Banks) to apply online for the rights issue.
- Offline/Physical ASBA : To apply offline, you can submit a physical application for participating in the rights issue to the designated branch of SCSBs*.
*Please check the complete list of existing SCSBs here.
The new process of rights entitlement has transformed and digitalized the old and time-consuming physical rights issue process. It has fast-tracked the system and brought more transparency to it. Rights entitlement provides a window of opportunity to buy shares at a discounted price or renounce rights at a higher price to earn good returns.