The recent news reports have highlighted that companies such as Mahindra Finance, Tata Power, and Shriram Transport Finance are among those planning to raise funds through ‘rights issues’ amidst the Covid-19 pandemic. This method of fundraising gained prominence after Reliance Industries Limited (RIL) successfully concluded its rights issue, raising a total of Rs. 53,124 crore.
Reasons for the Popularity of Rights Issues
The successful conclusion of RIL’s rights issue, which turned out to be India’s largest rights issue ever, shows that there is a huge demand in the market for the shares of companies with strong credentials at a good price. The oversubscription of 1.59 times witnessed by RIL’s rights issue further supports this claim.
Understanding the Concept of Rights Issue
A rights issue is a mechanism through which companies raise additional capital from existing shareholders. This approach is different from a public issue (Initial Public Offer) and private placement. It has become an efficient mechanism for raising capital without the need for a shareholder’s meeting or bank loan, with just the approval from the board of directors proving sufficient.
Advantages of Rights Issues
Companies resort to rights issues for various reasons, including clearing debt obligations, acquiring assets, or facilitating expansion. One key advantage is the shorter turnaround time for raising capital, which makes it particularly suited to the current climate induced by the Covid-19 pandemic.
Concerns Regarding Rights Issues
Despite the benefits, there are concerns associated with raising funds through rights issues. It can potentially create pressure on the company and dilute the value of each share. If the share price decreases post a rights issue, investors may lose the holding value. Stock exchanges also impose a limit on the amount a company can raise via a rights issue.
Reforms Concerning Rights Issues
The Securities and Exchange Board of India (SEBI) has introduced some new reforms regarding rights issues. In November 2019, it streamlined the rights issue process and reduced the completion time from T+55 days to T+31 days, equating to a 40% reduction. It also minimized the notice period for a rights issue from seven working days to just three.
Temporary Relaxations Amidst the Pandemic
Given the ongoing situation due to the Covid-19 pandemic, SEBI has also provided temporary relaxations for rights issues that occur on or before 31st March, 2021. These include reducing the average market capitalization requirement from Rs. 250 crore to Rs. 100 crore for fast track rights issuance, and cutting down the minimum subscription requirement from 90% to 75% of the issue size. Moreover, listed entities raising funds up to Rs. 25 crores through a rights issue are now exempt from filing draft offer documents with SEBI.
These modifications have been made with the intention of simplifying the rights issue process and thereby encouraging more companies to opt for this mode of capital raising during these testing times. With these relaxations and reforms, it is anticipated that the use of rights issues as a fundraising mechanism will further increase in the near future.
