How to Apply for Rights Issue Online?

Firms regularly raise additional funds to achieve their growth targets, reduce debt, and pursue new business ideas. One way to do that is to conduct a rights issue, which allows existing shareholders to acquire extra stock for a lower price. Investors need to understand the mechanism of a rights issue to make smart investment decisions.

Key Takeaways:

• A rights issue allows existing shareholders to buy additional shares at a discounted price before they are offered to the public.
• The number of shares you can purchase depends on your existing shareholding and the announced rights ratio.
• Companies use rights issues to raise capital for expansion, repay debt, meet working capital needs, or strengthen their balance sheet. 

What is a Rights Issue?

A rights issue involves a company raising extra funds by offering additional shares to its shareholders at a price that is lower than the market rate. In contrast to a public offering, where everyone has the chance to invest, a rights issue is reserved only for existing shareholders. 

This provides a company with the required amount of liquidity while only shareholders can exercise their rights, as opposed to a regular public offering where anyone can buy stocks. The number of shares you can buy generally depends on the shares you currently own.

How Does It Work?

A rights issue follows a structured process that allows existing shareholders to buy additional shares before they are offered to the public.

• Company Announces the Rights Issue: The company declares its plan to raise capital by issuing additional shares. It announces the issue price, rights ratio (such as 1:5), record date, and subscription period.
• Eligibility Is Determined:  Shareholders who own the company's shares on the record date become eligible to receive rights entitlements.
• Rights Are Offered to Shareholders: Eligible shareholders receive the right to purchase additional shares at a price that is usually lower than the current market price.
• Shareholders Choose an Option: Shareholders can:
  • Subscribe to all or part of their rights.
  • Renounce (sell or transfer) their rights, if permitted.
  • Ignore the offer, allowing the rights to lapse.
• New Shares Are Allotted: After the subscription period ends, the company allots the new shares to shareholders who exercised their rights, and the shares are credited to their Demat accounts.

Example: Suppose a company announces a 1:5 rights issue at ₹80 per share, while the market price is ₹100.

• You own 500 shares.
• You are entitled to buy 100 additional shares (1 for every 5 shares held).
• If you subscribe, you pay ₹8,000 (100 × ₹80) for the new shares.

This allows you to increase your shareholding at a price below the prevailing market value.

How to Apply for a Rights Issue?

A rights issue can be applied for through two modes: online and offline. The application process is simple and requires shareholders to submit their application and payment within the specified deadline. 

How to Apply for a Rights Issue Online

• Step 1: Log in to your broker's platform or net banking (ASBA) account.
• Step 2: Select the rights issue and enter the number of shares you want to apply for.
• Step 3: Authorise the payment or set up an ASBA mandate.
• Step 4: Submit the application before the issue closes.

How to Apply for a Rights Issue Offline

• Step 1: Collect the rights issue application form from the registrar or designated bank branch.
• Step 2: Fill in the required details, including your demat account information and the number of shares.
• Step 3: Submit the completed form along with the payment at the designated collection centre or bank.
• Step 4: Wait for the allotment, after which the shares are credited to your demat account.

Benefits of a Rights Issue 

A rights issue benefits both the company and the shareholders. Let's see in detail how exactly they benefit

For Companies

• Raise capital for growth initiatives: Companies can raise money for expansion, paying off debts, buying other companies, or working capital requirements.
• No dilution of ownership: As shareholders are offered the subscription, it helps reduce dilution of ownership.
• Reduction in costs: The costs associated with the rights issue are lower and faster than those associated with a public issue.

For Shareholders

• Discounted buying of shares: Existing shareholders are allowed to buy the new shares at a price lower than the market price.
• Avoid dilution of ownership: The subscription to the rights issue prevents the dilution of ownership.
• Growth potential: The rights issue provides shareholders with an opportunity to subscribe to new shares issued at a discount, which may have higher growth potential.

What Makes a Company Announce a Rights Issue?

Whenever an organisation seeks more funding, it may implement a rights issue. A rights issue allows existing shareholders to take the first step to raise capital for the company. The reasons for a rights issue typically involve financial needs, such as:

• Expanding business: The need for additional funds for investments or expansion projects.
• Paying off debts: Committing to pay loans and enhancing the financial position of the company.
• Working capital needs: Needing funds for day-to-day operations.
• Taking care of the firm's balance sheet: Improving liquidity and decreasing financial burden.
• Taking advantage of growth prospects: Funding investments in new products or technologies, or marketing initiatives.
• Preventing new debts: Gathering financing without generating any liabilities.

Conclusion

A rights issue is a useful avenue for companies to accumulate funds while allowing their existing stockholders an opportunity to increase their investments. This option can facilitate business development, improve a company's financial status, and secure stockholders' stake at a discount.