Why Companies Are Raising Capital Through Rights Issue

Table of Contents

What’s a rights issue?

A rights issue is a way by which a listed company can raise additional capital.
However, instead of going to the public,
The company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings.

Reliance Industries Limited recently concluded its rights issue, raising a total of Rs 53,124 crore.
Several companies, including Mahindra finance, Tata Power, Shriram Transport Finance among others plan to raise funds through rights issue amidst the Covid-19 pandemic.
RIL witnessed an oversubscription of 59 times.
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.
SEBI has provided temporary relaxations to companies in order to ease raising of funds.

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

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% 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.
Sebi on January 22, 2020, laid down the detailed procedure of the improved rights issue process and the dematerialised REs framework.

SEBI relaxed certain guidelines for right issues that open on or before March 31, 2021.
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.
Reduced the minimum subscription requirement from 90% to 75% 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.