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What is a rights issue?

Topics Covered: Inclusive growth and issues arising from it.

What is a rights issue?

What to study?

For Prelims and Mains: Meaning, features, comparison and significance.

Why in News?

Many companies including Reliance Industries Limited, 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.

What is rights issue?

It is an offering of shares made to existing shareholders in proportion to their existing shareholding.

  • Companies often offer shares in a rights issue at a discount on the market price.
  • Rights issues are used by companies seeking to raise capital without increasing debt.
  • Shareholders are not obliged to purchase shares offered in a rights issue.

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.

What were the temporary relaxations provided in the wake of Covid-19 by SEBI?

Sebi 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.

It 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.

InstaLinks:

Prelims Link:

  1. SEBI- composition and important functions.
  2. What is rights issue?
  3. Who can avail it?
  4. How is it different from conventional shares?

Sources: the Hindu.