4.1 Rights Issue Framework
A rights issue is a capital raising method where existing shareholders are given the right to purchase additional shares in proportion to their existing holdings, typically at a discount to market price.
Regulatory Framework (Chapter V - ICDR)
Key provisions governing rights issues:
- Regulation 62-74: Rights issue specific provisions
- Companies Act 2013 Section 62: Further issue of share capital
- Listing Regulations: Continuous disclosure requirements
Eligibility for Rights Issue
- Company must be listed for at least 3 years (relaxed in certain cases)
- Compliance with LODR requirements
- No pending investor complaints above threshold
- Promoter/directors not debarred by SEBI
- No wilful defaulter status
Fast Track Rights Issue (Regulation 99)
Eligible companies can use a simplified process:
| Criteria | Requirement |
|---|---|
| Listing History | Listed for at least 3 years on main board |
| Market Cap | Average market cap of Rs. 1000 crore or more |
| Trading | At least 10% shares traded annually for 3 years |
| Compliance | No adverse SEBI orders or investor complaints |
| Benefit | Letter of Offer need not be vetted by SEBI |
4.2 Entitlement Ratio
The entitlement ratio determines how many new shares each shareholder can purchase based on their existing holdings. Setting the right ratio involves balancing fundraising needs with shareholder appetite.
Entitlement Calculation
Example: 1:5 ratio means for every 5 shares held, shareholder can buy 1 new share
If shareholder holds 500 shares, entitlement = 500/5 = 100 new shares
Common Entitlement Ratios
| Ratio | Dilution Impact | Typical Use Case |
|---|---|---|
| 1:10 | ~9% dilution | Small capital requirements |
| 1:5 | ~17% dilution | Moderate fundraising |
| 1:2 | ~33% dilution | Significant expansion |
| 1:1 | 50% dilution | Major restructuring/acquisition |
| 2:1 | 67% dilution | Stressed situations/deleveraging |
Record Date and Ex-Rights
- Record Date: Shareholding on this date determines entitlement
- Ex-Rights Date: Stock trades without rights entitlement (typically 2 days before record date)
- Cum-Rights: Stock trades with rights entitlement attached
Stock price typically adjusts downward on ex-rights date to reflect the dilution. The theoretical ex-rights price (TERP) can be calculated to assess if the rights price offers value.
Example: Current price Rs. 100, Rights price Rs. 75, Ratio 1:4
TERP = (100 x 4 + 75 x 1) / 5 = 475/5 = Rs. 95
4.3 Renunciation of Rights
Shareholders who do not wish to subscribe to their rights entitlement can renounce (transfer) their rights to others, either for a premium or without consideration.
Renunciation Options
- Full Renunciation: Transfer entire entitlement to a single renouncee
- Partial Renunciation: Subscribe to part and renounce the balance
- Market Sale: Sell Rights Entitlement (RE) on stock exchange during trading window
- Lapse: Allow entitlement to lapse (no action required)
Rights Entitlement (RE) Trading
- Symbol: RE shares trade with suffix "-RE" on stock exchange
- Trading Window: Typically 4-5 trading days
- Settlement: T+2 like regular equity
- Price Discovery: Market-based, reflecting rights value
- Buyer Obligation: Must subscribe by paying rights price
Renunciation to Specific Persons
Off-market renunciation requires:
- Renunciation form (Part A and Part B of CAF)
- Signature verification by banker/SEBI registered intermediary
- Submission before issue closure
- No additional documentation for transfer within Rs. 2 lakh
Renounced rights that are not subscribed to by the renouncee will lapse. The original shareholder cannot reclaim lapsed renounced rights. Ensure renouncee is aware of subscription deadline.
4.4 Follow-on Public Offers (FPO)
A Follow-on Public Offer is a public issue of securities by an already listed company to the public at large, not restricted to existing shareholders like a rights issue.
FPO vs Rights Issue
Follow-on Public Offer
- Open to all investors (public)
- Book building or fixed price
- Higher regulatory compliance (like IPO)
- Longer timeline (2-3 months)
- Marketing intensive
- Typically at market price or slight discount
Rights Issue
- Only to existing shareholders
- Fixed price only
- Simplified compliance
- Shorter timeline (4-6 weeks)
- Minimal marketing needed
- Usually at significant discount (15-30%)
FPO Eligibility (Same as IPO)
FPO requires compliance with Chapter II (Public Issue) requirements:
- Profitability route OR QIB route eligibility
- Full prospectus/DRHP filing with SEBI
- Book building process (usually)
- Category-wise allocation (QIB/NII/Retail)
- Anchor investor framework applicable
When to Choose FPO vs Rights
| Factor | Favor FPO | Favor Rights |
|---|---|---|
| Investor Base | Want to expand shareholder base | Maintain existing structure |
| Pricing | Strong market, premium possible | Weak market, discount acceptable |
| Timeline | Not urgent | Quick funding needed |
| Cost | Higher (marketing, compliance) | Lower |
| Promoter Stake | Dilution acceptable | Maintain proportional holding |
4.5 Promoter Contribution
SEBI mandates minimum promoter contribution in public issues to ensure promoters have skin in the game and their interests are aligned with public shareholders.
Minimum Promoter Contribution (Regulation 14)
- Minimum: 20% of post-issue paid-up capital
- Source: Must be from promoter's own funds (not borrowed)
- Timing: Contribution before opening of issue
- Certification: CA certificate for sources of funds
Lock-in Requirements
| Category | Lock-in Period | Notes |
|---|---|---|
| Minimum Promoter Contribution (20%) | 18 months | Reduced from 3 years in 2022 |
| Excess Promoter Holding | 6 months | Reduced from 1 year in 2022 |
| Pre-IPO Shareholders (1 year holding) | Nil | No lock-in if held for 1 year before filing |
| Pre-IPO Shareholders (less than 1 year) | 6 months | From date of allotment in IPO |
| Anchor Investors | 30 days | From date of allotment |
Rights Issue - Promoter Subscription
In rights issues:
- No Minimum: Promoters not required to subscribe minimum amount
- Disclosure: Must disclose intention to subscribe/renounce
- Underwriting Alternative: If promoters not fully subscribing, arrangement for shortfall required
- Public Perception: Promoter subscription signals confidence
Promoter subscription commitment in rights issue is a key investor consideration. Even if not mandatory, advisable to commit to subscription and disclose this prominently in offer documents.
"Promoter contribution requirements ensure that those who know the company best have significant financial stake in its success. This alignment of interests is fundamental to investor protection." SEBI Concept Paper on ICDR Reforms, 2021
Key Takeaways
- Rights issue offers shares to existing shareholders proportionally at a discount
- Entitlement ratio determines new shares per existing shares held
- Rights can be renounced (transferred) via market sale or off-market
- RE trading window allows market-based price discovery for rights value
- FPO is open to all investors; Rights issue only to existing shareholders
- Minimum 20% promoter contribution with 18-month lock-in for IPO/FPO
- Fast track rights available for eligible companies (no SEBI vetting)