When a listed company wants to raise additional share capital from their existing shareholders, they do it through right issues.
In right issues, the existing shareholders are given the right to buy new shares in proportion to their shareholding.
If a company has decided the right issue ratio as 1:14, then existing shareholders will be eligible for one share for every 14 equity shares held. This is known as RE or right entitlement.
Now the eligible shareholders have following two options;
- Apply for the rights, or
- Sell their rights entitlement in the market
Rights issues entitlement is decided based on how many shares you are holding on the record date.
Record date, Ex-date and rights entitlement
Before getting into the record date, ex-date and rights issue entitlement discussion, let us understand what is ex-date, record date and the importance of it.
Ex-date is the day on which a stock starts trading without the benefit of corporate action, i.e., ex-benefit.
Ex-date is one day before the record date.
Record date is when the company checks its records to identify the eligible shareholders for a corporate action such as entitlement of rights shares, bonus shares, stock splits, dividends, etc.
Shareholders holding the shares in their Demat accounts on the record date are eligible for corporate actions.
If you had the shares in your holdings on the record date, even if you sell on the record date you’ll still be eligible to apply for the rights.
Example: Suppose that the record date for a right issue of XYZ company limited is Wednesday. The ex-date for the XYZ company limited will be Tuesday i.e. one trading day before the record date. To get the right issue entitlement benefit, shares of XYZ company limited should be bought on or before Monday.
Until Monday, shares of XYZ company limited will be trading with the right issue benefits and the stock will trade ex-corporate action from Tuesday. Shares purchased on Tuesday will not be eligible for the right issue benefits
You should have purchased the shares before the ex-date to be eligible for the rights issue.
You can refer to our article written on the settlement cycle in India to have a better understanding of the clearing and settlement process.
Now the question is Will you be eligible for the rights issues if you sold the shares on the ex-date?
Yes, if you have sold your shares after the ex-date then you are entitled to receive the right entitlement (RE). Your entitlement will be credited to your stock broker on your behalf and the stock broker will then credit them to you.
If your shares are pledged with the broker, then the stockbroker will receive the right entitlement (RE) in their Demat account. Subsequently they will do an off-market transfer to their respective client accounts. Shareholders will receive the right entitlement (RE) even if they do not unpledge their holdings.
If you do not apply for the online right issue, your REs will lapse and you will lose the premium paid to acquire them.
In case you have bought REs but don’t have shares, you’re still eligible for the rights issue. You may apply for the rights shares.
RE will be in the form of temporary Demat securities which will lapse if not renounced/exercised once the trading window is closed.
Anyone can sell the REs at a price someone’s willing to pay for it. Market forces will determine the price at which the REs will trade.
If you’re buying REs from the secondary market, you’re buying it from someone who is renouncing his right. The seller would be the renouncer and the buyer would be renouncee.
The taxation of right shares sold would be the same as in case of sale of equity shares.
