Rights entitlement allows existing shareholders to purchase additional shares at a discounted rate. Learn how this process works and its benefits.
Capital is one of the most fundamental factors in a business's operations. If a company wants to hire new employees, it must have additional capital to pay their salaries. Similarly, if it wants to start a new factory to manufacture more products to meet demand and increase sales, it must have enough capital for infrastructure expenses. Private companies can look towards private investors such as venture capitalists to raise money and have enough capital. However, public companies with listed shares on stock exchanges, such as NSE and BSE, have the option to raise additional capital for their current shareholders. The shareholders also benefit as they receive additional shares at a discounted price, increasing their profit potential.
If you are a stock market investor and have stocks of various companies in your demat account, it is vital to understand a capital raising process called rights entitlement. This blog will help you understand what rights entitlement is and how it can increase your profit potential.
A rights entitlement (RE) is a temporary security issued to existing shareholders by companies who want to raise additional capital. The shares issued to existing shareholders are part of the rights issue announced by the company and require the shareholders to either apply, sell, or let the shares expire. If the shareholders apply for the shares under rights entitlement, they must pay the amount at which the company has issued the shares. The shares are generally issued at a discounted price, which is lower than the current trading price of the stocks. Hence, right entitlement represents the shareholder's right to buy additional shares at a discounted price before the offer is made to the general public.
The additional shares are issued to the shareholders based on their existing holdings. For example, if a company announces a 1:5 rights issue, shareholders receive one additional share for every five shares they own.
When a company wants to raise additional funds, it can either do so through a Follow-on Public Offer (FPO) or through rights entitlement. Rights entitlements give the current shareholders an option to buy additional company shares at a discounted price. Once a company announces a rights entitlement, the temporary shares are automatically credited to the demat accounts of eligible shareholders on the record date. The record date is the cut-off date to determine eligible shareholders.
Once the shareholders receive the shares in their demat accounts, they can either apply for or sell them in the secondary market. Shareholders can trade rights entitlement shares on the stock exchange like regular shares during a specific window and make profits by selling them to other investors. If shareholders want to apply for the shares, they are required to pay for them before the rights issue window closes. The rights entitlement lapses if they choose not to exercise their additional shares or sell them.
Here is how the right entitlement affects your investments once announced by the companies:
Here are the key benefits of rights entitlement
If you have received rights entitlement, follow the below process to exercise them:
Rights entitlement is a process used by companies to raise additional funds by issuing additional shares to the current shareholders at discounted prices. Under rights entitlement, the shareholders have the option to either sell the shares, exercise them, or let them lapse. The shareholders benefit from rights entitlement as they can make extra profits by selling them or getting additional shares of the company if they exercise the right. Now that you know what rights entitlement is, you can make an informed decision on whether to sell, apply, or let them expire.
You are eligible for rights entitlement if you own shares of the company on the record date specified for the rights issue. The company announces the record date in advance.
Yes, you can sell your rights entitlement on the stock exchange during the trading window specified for the rights issue. This allows you to make extra profits if you choose not to exercise it.
If you don’t exercise your rights entitlement, it will expire after the rights issue closes, and you won’t be able to buy additional shares at the discounted price.
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