Explained: New rules governing rights issues, and implications for shareholders

Capital markets regulator Securities and Exchange Board of India (SEBI) has come out with guidelines that allow listed companies to serve the letter of offer, application form, and other offer material electronically. What changes for a share holder?

The portrait of Mahatma Gandhi is displayed on an Indian 2,000 rupee banknote. (Bloomberg Photo: Brent Lewin)

The Ministry of Corporate Affairs announced this week that listed companies that come out with rights issues before July 31 would not be required to notify shareholders about the issue through postal or courier services because of restrictions on travel and transport due to the Covid-19 outbreak.

What are the implications for shareholders of this ‘Clarification on dispatch of notice under section 62(2) of Companies Act, 2013 by listed companies for rights issue opening upto 31st July, 2020’ issued on Monday (May 11)?

First, what is a rights issue?

A rights issue 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.

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Rights issues are used by companies seeking to raise capital without increasing debt.

Do shareholders have to purchase shares in a rights issue?

No. Shareholders are not obliged to purchase shares offered in a rights issue. However, not participating in a rights issue may dilute their overall stake in the company, as there would be a larger number of outstanding shares of the company post the issue.

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Share prices also tend to come down after a rights issue as the earnings of the company in the future would be divided among a larger number of shares.

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As per the May 11 notification, if not through post, how will shareholders be notified?

Capital markets regulator Securities and Exchange Board of India (SEBI) has come out with 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 SMS, advertisements on television or digital advertisements besides publishing an advertisement in a newspaper which is ordinarily required.

Issuers will also be required to publish the letter of offer and other offer material on their websites, with the Registrar of Companies, and the stock exchange.

What kind of problems may arise as a result of this move?

Shareholders whose email addresses are not registered with the company may not find out about the rights issue, and therefore miss out on the opportunity to invest.

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This may lead to an increase in the unsubscribed portion of a rights issue, allowing promoters who typically reserve a right to invest in the unsubscribed portion of the issue to increase their stake in the company.

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Incidentally, Reliance Industries has announced a rights issue to raise Rs 53,125 crore through a 1:15 rights issue at a price of Rs 1,257 per share, under which all shareholders of Reliance Industries will have the right to acquire 1 share in the new issuance for every 15 shares they hold in the company on May 14, which has been set as the record date.