Rights issue amidst Covid-19 pandemic

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  Rights issue amidst Covid-19 pandemic

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Key point – 

1. As per the reports, several companies, including Mahindra finance, Tata Power, Shriram Transport Finance among others plan to raise funds (more than Rs 10,000 crore) through rights issue during the Covid-19 pandemic.

Success of RIL - 

1. It recently concluded its rights issue, raising a total of Rs 53,124 crore and witnessing an oversubscription of 1.59 times or received applications worth over Rs 84,000 crore.
2. This shows that there is investor appetite in the market for good companies with strong credentials at a good price.

Rights issue - 

1. It is a dividend of subscription rights to buy additional securities in a company made to the company's existing security holders.
2. When the rights are for equity securities, such as shares, in a public company, it is a non-dilutive pro rata way to raise capital.

Why rights issue in current times - 

1. For this, there is no requirement of shareholders’ meeting and an approval from the board of directors is sufficient and adequate.
2. The turnaround time for raising this capital is short and is much suited for the current situation. Thus the rights issue are a more efficient mechanism of raising capital.
3. Has SEBI made changes to ease rights issue: Over the last one year, the regulator has undertaken major steps to reform the rights issue process. It also provided some temporary relaxations in the wake of Covid-19 pandemic.

Temporary relaxations provided in the wake of Covid-19 by SEBI -

1. It relaxed certain guidelines for right issues that open on or before March 31, 2021.
2. It reduced the eligibility requirement of average market capitalization of public shareholding from Rs 250 crore to Rs 100 crore for a fast track rights issuance
3. It also reduced the minimum subscription requirement from 90 per cent to 75 per cent of the issue size.
4. Also, listed entities raising funds up to Rs 25 crores (erstwhile limit was Rs 10 crores) through a rights issue are now not required to file draft offer document with the regulator.

Reforms undertaken by SEBI for rights issue -

1. In November 2019, it streamlined the rights issue process and the timelines for completion was significantly reduced from T+55 days to T+31 days — a 40 per cent cut in the time.
2. It has also reduced the advance notice for the record date from seven working days to three working days.
3. In January 2020, it laid down the detailed procedure of the improved rights issue process and the dematerialised rights entitlements (RE) framework.
4. Shareholders with small holdings, who were earlier not able to renounce REs for lack of an accessible platform, can renounce and trade their REs easily now.

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