why-companies-are-going-for-rights-issue-amidst-covid-19-pandemic

Context: Reliance Industries Limited recently concluded its rights issue, raising a total of Rs 53,124 crore and witnessing an oversubscription of 1.59 times or received applications worth over Rs 84,000 crore. 

More on the news: 

  • Reports suggest that several companies, including Mahindra finance, Tata Power, Shriram Transport Finance among others plan to raise funds through rights issue amidst the Covid-19 pandemic.
  • It is important to note that the capital markets regulator, Securities and Exchange Board of India (SEBI) has undertaken certain reforms over the last one year that has made rights issue a more efficient process and has provided temporary relaxations to companies in order to ease raising of funds.

What is rights issue?

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.

Advantages of going for rights issue for companies:

  • For a rights issue, there is no requirement of shareholders’ meeting and an approval from the board of directors is sufficient and adequate. 
  • Therefore, the turnaround time for raising this capital is short and is much suited for the current situation unlike other forms that require shareholders’ approval and may take some time to fructify.
  • Thus the rights issue is a more efficient mechanism of raising capital.

Changes made by regulator to ease rights issue: 

  • SEBI has undertaken significant steps to reform the rights issue process. This can be divided into some permanent reforms in the process  and some temporary relaxations in the wake of Covid-19 pandemic.

Temporary relaxations provided in the wake of Covid-19 by SEBI:

  • 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 .

Source: https://indianexpress.com/article/explained/reliance-companies-going-for-rights-issue-covid-19-pandemic-6452544/