What is a Rights Issue?

By Morningstar |  18-05-20 | 

When a company comes out with a fresh issue of equity and offers an opportunity to the existing shareholders of a company, to buy additional shares directly from the company at a discounted price, rather than from the secondary market, it is called a rights issue.

A rights issue gives preferential treatment to existing shareholders. They are given the right, NOT obligation, to buy the shares before a specified date.

But it does not mean that a shareholder can buy unlimited shares. For example, a 1:15 rights issue means that one equity share can be subscribed to for every 15 shares held by the investor as on the specified date (record date).

Currently, Reliance Industries Ltd, or RIL, has come out with a rights issue.

Rights issues are often used by companies to raise funds, acquire assets, or clear debts.

According to Bloomberg, RIL has significant liquidity with $23.4 billion of cash and cash equivalents. So it is not a question of raising funds, rather it is more to do with deleveraging its balance sheet.

Last year, Mukesh Ambani expressed his desire to cut debt to zero by March 31, 2021. The company's net debt was at Rs 1.53 lakh crore as on December 31, 2019.

Subsequently, the firm has been exploring strategic partnerships across its businesses. The rights issue is part of RIL's plans to become a zero net-debt company by the target date.

  • RIL’s fundraising of Rs 53,125 crore by way of a rights issue, is India’s biggest.
  • The last time RIL tapped the public for funds was in 1991 when it had issued convertible debentures. The debentures were subsequently converted into equity shares at Rs 55 apiece.
  • This rights issue is being seen as an attempt to reward the shareholders, cut debt and underscore promoters’ faith in RIL. Promoter Ambani family has under-written the entire rights issue, pledging to buy shares that are unsubscribed.
  • It will open on May 20 and close on June 3.
  • The shareholders of RIL will be offered one new share for every 15 held at Rs 1,257 apiece. Shareholders who subscribe to the rights issue will have to pay Rs 25 per share at the time of application and the rest Rs 942.75 in one or more subsequent tranches as determined by the firm.

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