What is Rights Entitlement?

Rights entitlement refers to the right granted to existing shareholders to purchase additional shares of a company during a rights issue. This entitlement is typically offered at a discounted price and is proportional to the shareholder’s existing holdings. It empowers shareholders to maintain their ownership percentage while supporting the company in raising additional capital.

In the Indian share market, rights entitlements (REs) are tradable instruments, providing flexibility to shareholders to either subscribe to the offer or sell their entitlements.

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Key Features of Rights Entitlement

1. Proportional Allocation:
   • Shareholders are offered additional shares in proportion to their current holdings.
2. Discounted Price:
   • Shares are usually offered at a price lower than the prevailing market price.
3. Transferability:
   • In the Indian context, REs can be traded on the stock exchange, allowing non-subscribing shareholders to monetize their entitlements.
4. Limited Time Period:
   • The entitlement and the subsequent rights issue are open for a specific period.
5. No Compulsion:
   • Shareholders are not obligated to exercise their rights and can choose to sell their entitlements instead.

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How Does Rights Entitlement Work?

The process of rights entitlement involves the following steps:

1. Announcement:
   • The company announces a rights issue, detailing the ratio, issue price, and record date.
2. Allotment of Rights Entitlements:
   • Eligible shareholders receive REs credited to their demat accounts.
3. Options for Shareholders:
   • Subscribe to the rights issue.
   • Sell the REs on the stock exchange.
   • Let the REs lapse (not recommended).
4. Trading of REs:
   • REs are listed and traded on the exchange for a limited period, allowing shareholders to sell or buy additional entitlements.
5. Application and Allotment:
   • Shareholders who subscribe receive additional shares post-closure of the issue.

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Example of Rights Entitlement

Hypothetical Scenario:

• Company ABC announces a rights issue in a 2:5 ratio (2 additional shares for every 5 held).
• Issue Price: INR 100 (current market price: INR 150).
• Shareholder Holding: 100 shares.

Rights Entitlement Calculation:

Details	Value
Shares Held	100
Entitled Shares	25×100=40\frac{2}{5} \times 100 = 4052​×100=40
Total Cost	40 × INR 100 = INR 4,000

Shareholders can subscribe by paying INR 4,000, sell the REs, or let them lapse.

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Historical Perspective on Rights Entitlements in India

Evolution Timeline:

Year	Milestone	Impact
2009	SEBI made REs tradable	Increased flexibility for shareholders
2015	Introduction of electronic applications	Simplified the subscription process
2020	Popular rights issues by major companies like Reliance Industries	Boosted investor awareness about REs

Key Rights Issues in Recent History:

Company	Year	Ratio	Issue Price (INR)	Market Price (INR)	Subscription (%)
Reliance Industries	2020	1:15	1,257	1,480	114
Tata Power	2021	1:5	60	72	95
Bharti Airtel	2022	1:14	535	680	100

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Benefits of Rights Entitlement

1. Retention of Ownership:
   • Allows existing shareholders to maintain their ownership stake in the company.
2. Cost-Effective Investment:
   • Shares are offered at a discounted price, providing value to shareholders.
3. Liquidity for Non-Subscribers:
   • Tradable REs allow shareholders to monetize their entitlements.
4. Support for the Company:
   • Helps the company raise funds without increasing debt.

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Challenges of Rights Entitlement

1. Dilution Risk:
   • Non-subscribing shareholders face a reduction in their ownership percentage.
2. Market Fluctuations:
   • Rights issues may coincide with adverse market conditions, impacting share prices.
3. Limited Awareness:
   • Retail investors may not fully understand the benefits of rights entitlements.

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Rights Entitlement vs. Bonus Shares

Aspect	Rights Entitlement	Bonus Shares
Purpose	Raising capital	Rewarding shareholders
Price	Offered at a discounted price	Issued free
Impact on Ownership	No dilution if subscribed	No impact

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Strategies for Investors

1. Evaluate the Offer:
   • Assess the issue price and market price to determine profitability.
2. Monitor Trading:
   • Keep an eye on the RE trading period to decide on selling or subscribing.
3. Understand Dilution:
   • Calculate the impact of not subscribing on your ownership percentage.
4. Analyze the Company’s Objective:
   • Ensure the funds are being raised for growth-oriented projects.

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Conclusion

Rights entitlement is a crucial mechanism in the Indian share market that empowers shareholders to support a company’s growth while benefiting from discounted share prices. By understanding its features, benefits, and trading dynamics, investors can make informed decisions that align with their financial goals.

This comprehensive guide provides a detailed overview of rights entitlements, ensuring you are well-equipped to navigate such opportunities in the stock market.