Rights issue has been seen as a preferred method for public companies to raise money. In June, market heavyweight Reliance Industries raised Rs 53,125 crores through this method.
A 1:10 rights issue means that an existing shareholder can buy 1 share for every 10 shares currently held.
What happens when a company announces a Rights Issue?
With more shares in the market, debt-to-equity ratio decreases and companies get more comfortable to avail additional debt.
In theory, fresh shares are issued without a change to the company’s market cap and hence existing shares are diluted. Prices may fall to the proportion of the rights issue. But sometimes the market may feel that the company is in a better position due to the additional capital raised. In this case, prices need not fall in the proportion and market cap may increase.
How to subscribe?
When you are an existing shareholder on the record date, you get Rights Entitlement (RE) shares in your account. If you do not wish to avail it, you can either usually sell the RE shares in the secondary market, or let it lapse.
You can apply through ASBA (Applications Supported by Blocked Amount), though your bank if it supports the process. It is very similar to applying for an IPO.