Ownership rights to shares, the relatively new entrant to the Indian stock market, made the news recently when India’s largest brokerage firm Zerodha announced that its clients had lost Rs 10 crore in expired rights. Property rights are a recent concept, having been introduced to the Indian stock markets only in May of last year 2020 with the mega Rs 53,125 crore of RIL.
Rights Rights are granted to shareholders by a company that initiates a rights issue, giving them the right to subscribe to the issue or sell it to other willing investors. Property rights (RE) are issued in a similar manner to rights issuance, in the same ratio, to shareholders as on the registration date.
According to the capital markets regulator SEBI, a shareholder can choose not to subscribe to the rights issue and let the right expire. Or, the shareholder can exchange the right in favor of another person for a price. REs which are neither subscribed nor renounced before the closing date of the issue lapse at the close of the issue.
How People Lose Money in RE
The rights are credited in the demat accounts of the eligible shareholders of a company which is the subject of a rights issue. Investors who do not wish to apply for the rights issue have the option of selling their ERs to other investors who wish to purchase shares at a reduced price in the corresponding rights issue. “People can lose money in rights in two ways: first, when the eligible shareholder leaves the right without requesting the issue of rights; and second, when investors buy the rights from eligible shareholders during trading but do not request the issuance of the rights before the end of the nomination deadline, ”said Ravi Singh, vice president and chief research officer , Karvy Group, to UK Time News Online.
The mechanism behind the rights issue is that only those who own the shares on the registration date are eligible to subscribe to the proposed rights issue. “Any investor who has property rights (RE) forgets or does not want to apply for the rights shares, loses the value of their REs,” Zerodha’s Mohit Mehra told UK Time News Online. REs are traded for a brief window on the exchange before they expire. In the event that a shareholder does not wish to request the rights issuance shares, Mehra advises to sell RE during this RE negotiation period. “In a rights issue, the benefit of these losses goes to an investor who may have requested more rights shares than the number of REs he holds in his demat account,” added Mehra.
How to calculate the value of ROEs?
The value of RE shares is more or less close to the spread between the company’s share price and the offer price of the rights issue. For example, if the price of a Company A share is trading at Rs 150 and it goes for a rights issue at Rs 125, the rights price is Rs 25 with a multiple of the minimum lot size. . In the case of RIL RE, one rights share was offered at Rs 1,257 and the market price of RIL during this period was Rs 1,437 per share. This means that the value of RE was Rs 180.
The question of RIL’s rights
Reliance Industries Ltd launched the largest rights issue ever in India valued at Rs 53,125 crore in May 2020. According to the payment structure offered by Reliance Industries Ltd for the rights issue, those who subscribed were only to pay only 25% of the price at the time of subscription and the remainder in two installments in May 2021 and November 2021. He offered RE shares to existing investors at a ratio of 1:15 at a price of Rs 1,257 per share. Following the RIL rights issue, more than 25 companies have offered rights issues since May 2020. It can be noted that RE trading begins on the opening date of the issue and closes at least four days. before the closing of the issue, so that the eligible shareholders are finalized.
(The opinions in this story are expressed by the respective experts of the research and brokerage firm. UK Time News Online assumes no responsibility for their advice. Please consult your investment advisor before investing.)