Lo incompensable a pesar de todo: lo irreparable y la acción humana

Rights issue means an issue of capital under Sub-section (1) of Section 81 of the Companies Act,1956, to be offered to the existing shareholders of the company through a letter of offer. The SEBI (ICDR) Regula-tions defi ne rights issue as an offer of specifi ed securities by a listed issuer to the shareholders of the issuer as on the record date fi xed for the said purpose; Section 81(1) of the Companies Act, specifi es the mode of making a rights issue. As per Clause (a) of this section, the rights shares ‘shall be offered to the persons who, at the date of the offer, are holders of equity shares of the company, in proportion, as nearly as circum-stances admit, to the capital paid-up on those shares at that date.’ Thus, for deciding the rights entitlement, only the capital paid up on each share is relevant.

Rights issue is the issue of new shares in which existing shareholders are given pre-emptive rights to subscribe to the new issue on a pro-rata basis. The right is given in the form of an offer to existing shareholders to subscribe to a proportionate number of fresh, extra shares at a pre-determined price.

• Rights issue is an offer of new securities by a listed company to its existing shareholders on a pro-rata basis

Companies offer shares on a rights basis either to expand, diversify, restructure their balance sheet or raise the promoter stake.

Promoters offer rights issues at attractive price often at a discount to the market price due to a variety of reasons. Firstly, they want to get their issues fully subscribed to. Secondly, to reward their sharehold-ers. Thirdly, it is possible that the market price does not refl ect a stock’s true worth or that it is overpriced, prompting promoters to keep the offer price low. Fourthly, to hike their stake in their companies, thus, avoid-ing the preferential allotment route which is subject to lot of restrictions. Moreover, funds can be raised by a company through this route without diluting the stakes of both its existing shareholders and promoters.

Rights Issue is different from public issue:

• In a rights issue, new shares are offered to existing shareholders while in a public issue shares are offered to public at large.

• In case of rights, shareholders can renounce their ‘rights entitlement’ (REs) while there is no rights entitlement in case of public issue.

• Rights shares are allotted based on shareholding as on record date as against ‘proportionate allot-ment’ based on application size in public issues. All details of shareholders on a record date is available with the company, other than those who have purchased RE from the market and become eligible for rights issue subsequently.

According to the SEBI guidelines, no listed issuer company shall make any rights issue of securities, where the aggregate value of such securities, including premium, if any, exceeds Rs. 50 lakh, unless a draft letter of offer has been fi led with the SEBI, through a merchant banker, at least 30 days prior to the fi ling of the letter of offer with the designated stock exchange.

The ICDR regulations put restrictions on the issue of rights shares: (a) No issuer shall make a rights issue of equity shares if it has outstanding fully or partly convertible debt instruments at the time of mak-ing rights issue, unless it has made reservation of equity shares of the same class in favour of the holders of such outstanding convertible debt instruments in proportion to the convertible part thereof and (b) the equity shares reserved for the holders of fully or partially convertible debt instruments shall be issued at the time of conversion of such convertible debt instruments on the same terms on which the equity shares offered in the rights issue were issued.

A listed issuer who wants to raise funds through a rights issue shall announce a record date for the purpose of determining the shareholders eligible to apply for specifi ed securities in the proposed rights issue. The issuer shall not withdraw rights issue after announcement of the record date. If the issuer with-draws the rights issue after announcing the record date, it shall not make an application for listing of any of its specifi ed securities on any recognised stock exchange for a period of 12 months from the day on which the record date was announced. The issuer may seek listing of its equity shares allotted pursuant to conversion or exchange of convertible securities issued prior to the announcement of the record date, on the recognised stock exchange where its securities are listed.

Companies issue right shares by sending a letter of offer to the shareholders whose names are recorded in the books on a particular date. A shareholder has four options in case of rights. The fi rst is to exercise his rights, i.e., buy new shares at the offered price, second is to renounce his rights and sell them in the open market, third is to renounce part of his rights and exercise the remainder, and lastly, choose to do nothing. Thus, rights issue application form has three parts. Part A deals with application by the share-holders (including request for additional shares), Part B deals with form of renunciation to be fi lled in by the shareholders who desire to renounce their RE, and Part C deals with application by renouncee(s).

Also, shareholders can request for split application forms wherein they want to renounce only a part of their entitlement and want to apply for the rest of their entitlement or the shareholders want to renounce their entitlement in favour of more than one person.

Rights market has been a favoured capital mobilising route for the corporate sector. However, this market shrunk from Rs. 15,000 crore a year to just about Rs. 1,500 crore. This was due to an absence of a trading platform for the post-issue trading of rights. Rights were traded through brokers by way of an over-the-counter market which does not lead to effi cient price discovery. Hence, those shareholders who do not subscribe to their entire entitlement let the unsubscribed rights expire. In addition, the rights issue process was cumbersome wherein the issue has to be kept open for 30 days and the disclosure norms are stringent. In order to activate the rights market and to make the process cheaper and faster, the SEBI eased the disclosure norms relating to the rights issue. For rights issues, the issuer is required to give only the audited accounts of the last fi nancial year and audited or unaudited fi nancials with limited review results for the remaining period instead of fi ve years’ restated fi nancials required earlier. Since rights are issued to shareholders who have already been receiving information about the company on a regular basis, the issuer need not give a summary of the industry and its business or information on its

past performance or management. Disclosures that have been done away with include summary of the industry and business of the issuer company, promise vs. performance with respect to earlier/previous issues, management discussion, and analysis. The disclosures relating to fi nancial statements, litiga-tions, risk factors, etc. have been simplifi ed.

In order to enable corporates to raise money faster, SEBI reduced the time line for approving a rights issue from 109 to 43 days. The reduction in timeline approved for rights issues include: the number of days for the notice period for a board meeting to be reduced from seven days to two working days; the notice period for record date to be reduced from 15/21/30 days to seven working days for all scrips; issue period to be reduced from minimum 30 days to a minimum of 15 days with a maximum of 30 days; and the time for completion of post-issue activity to be reduced from 42 days to 15 days. This will help the corporates to lower the risk due to an adverse change in market conditions and keep project costs under control.

In September 2008, the SEBI proposed trading in rights entitlements (RE) both electronically and physically through the stock exchange platform. Rights would be given a separate ISIN (code number for the security in a depository system) for it to trade on the exchange.

The proposed trading will work as follow:

(A) Electronic Rights Issue Process

1. The issuer fi xes a Record date to identify eligible shareholders. These shareholders would be entitled to subscribe to the proposed rights issue.

2. The issuer dispatches a letter to each shareholder informing that the rights entitlements have been credited into their respective demat accounts and duration of trading in RE and attaching the Let-ter of Offer and a Blank Application Form (unlike the present form which has shareholders’ name and entitlement printed on it) to all the shareholders on the record date.

3. The blank application forms shall also be available with the stock exchanges, merchant bankers, and brokers. Further, soft copy of the same shall be available on the websites of the aforesaid intermediaries.

4. The Registrar, on the instruction of the issuer, shall through credit corporate action, credit the RE in the given ratio into the demat accounts of the eligible shareholders (as on record date).

5. The Rights issue shall thereafter open for (a) subscription and (b) renunciation/trading of RE electronically through the stock exchange platform.

6. Trading will happen in REs on the secondary market platform of the stock exchanges as it hap-pens in case of ordinary shares. To separate the trading of REs from the trading of ordinary shares, a separate ISIN shall be given for the REs.

7. Shareholders, who do not want to exercise their RE, can renounce their RE by selling their REs on the electronic trading platform of stock exchanges.

8. The shareholders who have not renounced their RE and the renouncees who don’t want to renounce their RE further shall apply for shares against their RE during the issue period (which includes the trading period of RE) by submitting the application form received with the Letter of Offer/downloaded blank application form or by submitting the required information on a blank paper and submit the requisite payment instrument to Bankers to the issue.

9. Trading of RE may close at least three working days before closure of the rights issue so as to avoid last minute rush in submitting applications and to ensure that benefi cial owner of REs have suffi cient time to submit an application form. Once trading of REs closes, ISIN assigned to REs shall be suspended.

10. After the closure of trading and settlement of the trades done, the depositories shall make avail-able the list of RE holders on the date the ISIN was suspended and the list of shareholders on the record date to the Registrar with their respective number of REs.

11. Thereafter, the Registrar shall reconcile the application by matching the number of shares applied for with number of RE available in the respective demat accounts based on the aforesaid list.

12. The registrar shall fi nalise the allotment and thereafter on the instruction of the issuer, credit the rights shares through a credit corporate action, to the respective demat accounts.

13. Thereafter, the Registrar shall through a corporate action debit the REs from the respective demat accounts for (a) shares allotted and (b) lapsed REs.

(B) Physical Rights Issue Process

1. The issuer fi xes a Record date to identify eligible shareholders. These shareholders would be entitled to subscribe to the proposed Rights Issue.

2. The issuer dispatches the Letter of Offer and Composite Application Form (CAF) with a pre-printed unique no., name of the shareholder and his/her entitlement, to all the eligible sharehold-ers on the record date.

3. The Rights issue shall thereafter open for (a) subscription and (b) renunciation/trading of RE physically.

4. The shareholders who have not renounced their RE and the renouncees shall apply for shares against their RE during the issue period (which includes the trading period of RE) by submitting the CAF or by submitting the required information on a blank paper and submit the requisite pay-ment instrupay-ment to Bankers to the issue.

5. Trading of RE may close at least three working days before closure of the rights issue so as to avoid last minute rush in submitting applications and to ensure that benefi cial owner of REs have suffi cient time to submit an application form.

6. The Bankers to the Issue shall send the CAF/blank paper application to the Registrar.

7. Thereafter, the Registrar shall reconcile the application form as per the current practice.

8. The Registrar shall fi nalise the basis of allotment and send the physical share certifi cates to the shareholders.

The rights issues market made a come back after remaining dormant for over a decade. Companies fi nd it easier to raise funds through rights issues when the primary market is in doldrums. Most of the rights issues were offered at a discount to the ruling market price. Hence, shareholders enthusiastically responded to the rights issues. Fund mobilisation of Rs. 32,518 crore through rights issues in 2007 – 08 was the highest since 1992 – 93 (Table 6.4).

Besides the rights issue, several companies prefer private placement route to raise funds.