Ib-Ps Ch. 6 Rights Issues and Secondary Public Offers - PTR

Made to existing share holders only.
Entitlement to apply for and receive additional shares.
It’s a RIGHT, not an OBLIGATION.
For ascertaining the right, record date is fixed.
Entitlement ratio is fixed e.g. 1:2
- Thus if a shareholder has 200 shares he is entitled for 100 shares.

Shareholder can exercise or renounce his right to a third party.
Renouncee is entitled to subscribe & receive rights shares.
If the right is neither exercised nor renounced, it lapses and the issue is undersubscribed to that extent.
Promoters can seek to apply for those shares. The impact is change in shareholding pattern.
Oversubscription can occur if shareholders apply for additional shares. The letter of offer should specify the right to apply for more shares.


Considerations for Issuer

Objective of the Issue: Fund raising, consolidation or shareholder reward.
Is this an adequate source of financing?
If seeking shareholder loyalty, compare vis-à-vis bonus issue & higher dividend payout.
Overall condition of the primary markets.
Likelihood of poor response and its effect on market price of share.
Analysis of alternate sources of funding such as private placement.

Regulatory provisions

Companies Act.

Shares will be offered in proportion to their existing holding.
Minimum notice of 15 days.
If offer not exercised within time frame, it shall be presumed to be declined.
Right of renunciation given unless the articles of company provides otherwise.
If shareholder declines to accept offer, it can be disposed off by the board of directors.
The shareholder may be allowed to exercise the power of renunciation only once and not again under the pretext that the first renouncee has declined to accept the offer.

SEBI Guidelines

If aggregate value of issue is greater than Rs 50 Lakh, a letter of offer has to be filed with SEBI through an eligible merchant banker at least 21 days before filing the letter with the stock exchange.
If aggregate value of issue is less than Rs 50 Lakh, company prepares and files the letter of offer with SEBI. The issue shall be open within a year from the 22nd day of filing the letter provided no observations are made by SEBI.
All rights issues shall be made by offering the shares in dematerialized form.

Any listed company may freely price further offerings through a rights issue or any security convertible into equity.
The letter of offer to SEBI may have a price band of 20% and the actual price can be determined at a later date. The final letter of offer sent to shareholders shall contain a single fixed price.
The minimum contribution provision of promoters is not applicable to rights issues so long as they disclose their shareholding and extent of participation in the offer letter.
No company shall make a rights issue unless firm verifiable arrangements towards 75% of the stated means of finance, excluding the amount raised by rights issue is made.
No company shall make a further issue of capital by any means from the time the letter of offer is submitted to SEBI until either the money is refunded or the securities are listed.
A company cannot withdraw the rights issue after announcing the record date.
In exceptional circumstances if it needs to be done, then the company cannot make any listing application to any stock exchange for a period of 12 months from the announced record date.
A rights issue is kept open for a minimum period of 30 days and a maximum period of 60 days.
The quantum of issue cannot exceed the amount specified in the letter of offer.
Rights issue need not be underwritten. However if they are, underwriting requirements are the same as for a public issue.
No firm allotments and reservations can be made in a rights issue.
Minimum subscription of 90% is required for the company to be permitted to utilize the funds.