Meaning of Right Issue of Shares:
If a company plans to increase its paid-up share capital and also decides to offer its existing shareholders an option to retain their proportionate voting right in the company, it will offer the shares to the existing shareholders a right (which is termed as Right Entitlement) to subscribe to fresh issue in the proportion of their present shareholding(rights entitlement ratio), which gives them an option to purchase the fresh issue at a price lesser than market price. The issue of shares in this manner is called the right issue of shares.
It is pertinent to note that the right entitlement is only an invitation to offer and it only gives the existing shareholder a right either to subscribe to the shares of the company so as to retain their proportionate voting right or to sell their entitlement right to another person against consideration, this transfer of right is called renunciation. Here the shareholders are not under any obligation/ compulsion to exercise or renounce their right, it is only an option available to them.
This method not only helps the company to raise the capital from existing shareholders, but it also helps to prevent the dilution of equity right/ voting right of the existing shareholders. The Securities and Exchange Board of India (SEBI), has simplified the rights issue process to make it more efficient and effective, by amending the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”).
Accordingly, the following changes were made with respect to the Rights Issue process recently:
The period for advance notice to stock exchange(s) under Regulation 42(2) of LODR Regulations has been reduced from at least 7 working days to at least 3 working days (excluding the date of intimation and the record date), for the purpose of the rights issue.
Issuance of newspaper advertisement disclosing the date of completion of dispatch and intimation of same to the stock exchanges for dissemination on their websites, as per Regulation 84 (1) of ICDR Regulations, shall be completed by the issuer at least 2 days before the date of opening of the issue.
Introduction of dematerialized Rights Entitlements (REs). In the REs process, the REs with a separate ISIN shall be credited to the demat account of the shareholders before the date of opening of the issue, against the shares held by them as on the record date.
Payment mode - Application for a rights issue shall be made only through the ASBA facility. No withdrawal of application shall be permitted by any shareholder after the issue closing date.
Procedures of the Rights Issue process
As per SEBI guidelines, the procedure of right issue can be classified under five major heads viz. Application form, credit of Rights Entitlements (“REs”) in dematerialized form, renunciation process and trading of REs on the stock exchange platform, Submission of Application form in Rights Issue and finally allotment process in the rights issue.
1. Application Form
- The issuer shall dispatch a Common Application Form (CAF)to its shareholders as on the record date. Along with the application form, the issuer shall also send the details of the rights entitlements of the shareholder separately.
- This application form can be used both by shareholders or renouncee.
- Registrar to the issue shall also upload the application forms on its website.
- Applicants can use the application form available on the website of the registrar to the issue or printed forms sourced from the issuer, merchant bankers, or registrars to the issue.
- In terms of Regulation 78 of the ICDR Regulations, the investor also has an option to make an application in writing on a plain paper.
2. Credit of Rights Entitlements (“REs”) in dematerialized form
- The depositories shall put necessary procedures in place for the issue and credit of REs in demat mode.
- The issuer making a rights issue of specified securities shall ensure that it has made necessary arrangements with depositories to issue and credit the REs in demat mode in the demat accounts of shareholders holding shares as on the record date.
- A separate ISIN shall be obtained by the issuer for credit of REs.
- An issuer shall specify the ISIN for REs while announcing the record date.
- Based on the rights entitlement ratio, the issuer shall credit REs in dematerialized mode through corporate action to shareholders holding shares as on record date. The ISIN of REs shall be kept frozen (for debit) in the depository system till the date of opening of the issue.
- Physical shareholders shall be required to provide their demat account details to Issuer / Registrar to the Issue for credit of REs not later than two working days prior to issue closing date, such that credit of REs in their demat account takes place at least one day before issue closing date.
- In the case of fractional entitlements of REs, the fractional part shall be ignored by rounding down the entitlement.
- The issuer shall submit details of total REs credited to the stock exchanges immediately after completing the corporate action for the same and shall obtain requisite trading approval from the stock exchanges.
- The details with respect to shareholder entitlement shall be made available on the website of the Registrar to the issue and the investors shall be able to check their respective entitlements on the website of the Registrar by keying their details, after adequate security controls to ensure that investors’ information is made available only to the particular investor. The issuer shall also carry these links on their website.
- If the demat account of a shareholder is frozen or demat account details are not available, including shares held in an unclaimed suspense account or in the account of IEPF Authority, then REs shall be credited in a suspense escrow demat account of the Company and an intimation should be sent to such shareholder by the issuer /Registrar to the issue.
- The issuer shall intimate issue closing date to the depositories at least one day before the issue closing date, and the depositories shall suspend the ISIN of REs for transfers, from the issue closing date.
- REs which are neither renounced nor subscribed by the shareholders shall lapse after the closure of the Rights Issue.
- Issuer Company shall ensure that REs which are lapsed are extinguished from the depository system once securities are allotted pursuant to Rights Issue. Once the allotment is done, the ISIN for REs shall be permanently deactivated in the depository system by the depositories.
3. Renunciation process and trading of REs on the stock exchange platform:
- The stock exchanges shall put necessary procedures in place for the trading of REs on the stock exchange platform.
- REs credited to demat account can be renounced either by sale of REs using stock exchanges platform or off-market transfer and such trades will be settled by transferring dematerialized REs through depository mechanism in the same manner as done for all other types of securities.
- For the sale of REs through the stock exchange, investors can place orders for the sale of REs only to the extent of REs available in the demat account of the investor. Trading in REs on the secondary market platform of Stock exchanges will happen electronically on a T+2 rolling settlement basis where T is the date of trading. The transactions will be settled on a trade-for-trade basis.
- The issuer shall inform the dates of issue opening and closing to the stock exchanges and the depositories at the time of filing the letter of offer with the stock exchanges.
- Trading in REs shall commence on the date of opening of the issue and shall be closed at least four days prior to the closure of the rights issue.
4. Submission of Application form in Rights Issue
All investors (including renouncee) shall submit application forms using the ASBA facility through the Self Certified Syndicate Banks (SCSB) network during the issue period. Investor shall submit only one application form for REs available in a particular demat account.
5. Allotment process in the rights issue
- Facility for correction of bid data as collated by the SCSBs after issue closing shall be provided for a period of one day i.e. on the next working day after issue closing.
- Registrar shall obtain demographic details of all applicants from depositories.
- Registrar shall obtain details of holders of REs as on issue closing date, from the depositories.
- After the reconciliation of valid ASBA applications, funds blocked and REs demat holding list, the registrar shall finalize allocation of securities offered through a rights offering.
- Registrar shall credit the shares to the respective demat accounts of the applicants based on basis of allotment approved by the designated stock exchange and shall issue instructions to unblock bank accounts wherever necessary.
Source: SEBI Circular SEBI/HO/CFD/DIL2/CIR/P/2020/13 dated. January 22, 2020, and other SEBI guidelines
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