Why companies are going for rights issue amidst Covid-19 pandemic
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Reliance Industries Limited recently concluded its rights issue, raising a total of Rs 53,124 crore and witnessing an oversubscription of 1.59 times or received applications worth over Rs 84,000 crore. Moreover, reports suggest that several companies, including Mahindra finance, Tata Power, Shriram Transport Finance among others plan to raise funds (aggregating to over Rs 10,000 crore) through rights issue amidst the Covid-19 pandemic.
- While the success of RIL and the big demand shows that there is investor appetite in the market for good companies with strong credentials at a good price, it is important to note that the capital markets regulator, Securities and Exchange Board of India (SEBI), undertook certain reforms over the last one year that has made rights issue a more efficient process and has provided temporary relaxations to companies in order to ease raising of funds.
What is rights issue?
- A rights issues is a mechanism by which companies can raise additional capital from existing shareholders.
- While existing shareholders may not necessarily be able to participate in other fund-raising mechanisms like QIPs, preferential allotment etc, rights issue is a more democratic approach to raising funds as it allows the existing shareholders the right to invest first in the company.
Why are companies going for rights issue in current times?
- For a rights issue, there is no requirement of shareholders’ meeting and an approval from the board of directors is sufficient and adequate.
- Therefore, the turnaround time for raising this capital is short and is much suited for the current situation unlike other forms that require shareholders’ approval and may take some time to fructify.
- Thus the rights issue are a more efficient mechanism of raising capital.
Has the regulator made changes to ease rights issue?
- Over the last one year, SEBI has undertaken significant steps to reform the rights issue process. While SEBI made some permanent reforms in the process, it also provided some temporary relaxations in the wake of Covid-19 pandemic.
What were the temporary relaxations provided in the wake of Covid-19 by SEBI?
- In a bid to expand the universe of listed entities that are eligible for raising funds through fast track rights issuance and ease the process for companies to raise funds during the present crisis, SEBI relaxed certain guidelines for right issues that open on or before March 31, 2021.
- While it reduced the eligibility requirement of average market capitalisation of public shareholding from Rs 250 crore to Rs 100 crore for a fast track rights issuance, the regulator also reduced the minimum subscription requirement from 90 per cent to 75 per cent of the issue size.
- Also, listed entities raising funds upto Rs 25 crores (erstwhile limit was Rs 10 crores) through a rights issue are now not required to file draft offer document with SEBI.
What are the reforms undertaken by SEBI for rights issue?
- In November 2019, SEBI streamlined the rights issue process and the timelines for completion was significantly reduced from T+55 days to T+31 days — a 40 per cent cut in the time. It has also reduced the advance notice for the record date from seven working days to three working days.
- In a major move that makes it possible for eligible investors to subscribe and trade their rights entitlement (RE) and also makes it possible for interested investors to subscribe to more shares than they are eligible for, Sebi on January 22, 2020, laid down the detailed procedure of the improved rights issue process and the dematerialised REs framework.
- While the previous process of trading rights entitlement entailing physical settlement was marred with low liquidity, the decision to dematerialise the REs and permitting their trading through stock exchange framework ensures higher liquidity and determination of a fair market price for REs.
- Shareholders with small holdings, who were earlier not able to renounce REs for lack of an accessible platform, can renounce and trade their REs easily now. This reform enables all shareholders to renounce-cum-trade their entitlements and obtain a fair market price for the same. For shareholders who want to invest more, this also provides them with the opportunity to buy more shares from those who are willing to trade their REs in the market.