new-rules-governing-rights-issues-and-implications-for-shareholders-summary

Context: An announcement has come from the Ministry of Corporate Affairs regarding exemption of listed companies that come out with rights issues before July 31 from notifying shareholders about the issue through postal or courier services.

More on the news:

  • It has been decided due to ongoing restrictions on travel and transport due to the Covid-19 outbreak.
  • Securities and Exchange Board of India (SEBI) has released  guidelines that allow listed companies to serve the letter of offer, application form, and other offer material electronically.
    • Issuers will also be required to take adequate steps to reach out to shareholders through other means such as SMS, advertisements on television or digital advertisements besides publishing an advertisement in a newspaper.
    • It is also required on part of issuers to publish the letter of offer and other offer material on their websites, with the Registrar of Companies, and the stock exchange.

Implication for Shareholders

  • Shareholders whose email addresses are not registered with the company may not find out about the rights issue.
    • Such shareholders may miss out on the opportunity to invest.
    • Further this may lead to an increase in the unsubscribed portion of a rights issue. Shareholders who do not subscribe to their rights entitlements have their entitlement fall into the 'unsubscribed portion' category.
    • It will allow promoters to increase their stake in the company as promoters typically reserve a right to invest in the unsubscribed portion of the issue .

 

Rights issue

About

It is an offering of shares made to existing shareholders in proportion to their existing shareholding. 

  • Companies often offer shares in a rights issue at a discount on the market price.
  • Rights issues are employed by companies which seek to raise capital without increasing debt.

Shareholders obligation to purchase the Rights Issue

  • Shareholders are not obliged to purchase shares offered in a rights issue
  • However, if shareholders decide not to participate  in a rights issue, then it may dilute their overall stake in the company, as there would be a larger number of outstanding shares of the company post the issue.

Impact on Share prices

Share prices also tend to come down after a rights issue.

  • It is so because the earnings of the company in the future would be divided among a larger number of shares.

Promoter driven Firms

  • Corporate Promoter can be defined as a firm or person who undertakes the preliminary work incidental to the formation of a company.
    • It includes promotion, incorporation, and flotation of the company.
    • A promoter also solicits people to invest money in the company, at the time of its formation.
  • A promoter driven company  is one in which the majority of the stake is held by the promoter/person who has established the company and at least one representative of the family of promoters  is involved in the management or administration of the business.
    • For e.g. HCL driven by Shiv Nadar


Source: https://indianexpress.com/article/explained/new-rules-governing-rights-issues-and-implications-for-shareholders-6409974/