Rights Issue – Everything You need to Know About It

No one answer fits all. The rights issue is to raise money from the market. Companies need capital for many reasons, including an acquisition, set up a plant, and so on.

So how the company is going to use the fund will decide if it is good or bad for the company. Are they investing in the right direction or making a bad one.

Once you have the shares in your demat account on the record date, the day when the subscription for rights issue starts, you will have an online option in your demat account to apply.

However, you can also apply offline as well. The best is to contact your broker and ask for the details for the application for the rights issue.

Again, it all depends on the price and the ratio at which it is being offered.

In the Reliance Industries example, the share price for the stock was ₹1455, and the rights issue was at a price of ₹1257. Moreover, you could apply for 1 share for holding 15 in the demat account.

Let’s assume you get 1 share for each of the 15 shares you hold. So your average purchase price of the 16 shares become:

= (1455*15+1257)/16 = ₹1442

If you are fine investing in the company at that price, you should be fine applying.

The discount is offered to the current price is the main advantage of the rights issue for the investors.

However, in the charts above, one can see, the share price started to rise from ₹950 levels to ₹1450 levels just before the announcement of the rights issue.

After the rights issue end date, there will be a new date that the company will announce to allocate the extra shares to your demat account.

Once you have the shares, you can sell them like regular shares. However, remember it is the same day when everyone receives the shares. So it can mean there is a considerable selling pressure as well.

Depending on which day you are looking at the share price, there will be an impact. If the rights issue is offered at a significant discount and is lucrative for investors, the days before the record date, there will be a surge in demand to be able to apply for more shares.

Once the record date is done, the stock is an ex-rights issue, which means the demand will be sluggish, and stock price can come down.

The day the newly issued shares hit the market, there can be additional pressure on the price as investors pile up to sell their allocated shares.

No, the rights issue directly doesn’t increase the market cap of the company. The issue of extra shares should ideally dampen the market cap of the company by the same amount. However, as the stock is being traded in the market, there can be an extra demand for the shares, which may increase the companies market cap.

In our example of Reliance Industries, pre-right issues, the stock price increased from ₹950 to ₹1450. It is an increase in more than 40%.

Then because rights issue was lucrative, the price went even further for an increase in demand for the shares.

Ex-Rights Issue the share price is back to ₹1450.

The share price does reduce on the Ex-Rights day as well as when the extra shares hit the market.

However, depending on how the company is going to use the capital, the growth may be around. Still, the most important aspect is the use of capital that will decide the share price and not the rights issue itself for the long-term investors.