Since May 2020, when Reliance Industries Ltd rights challenge opened for subscription, prospects of India’s biggest brokerage firm Zerodha have lost Rs 10 crore in expired Rights Entitlements by not applying for shares. While most of this investor dollars was lost on account of the RIL rights challenge, some was lost in other troubles as nicely, Zerodha Founder and CEO Nithin Kamath stated. “Most of this is Reliance Industries given the size of its rights issue but it includes the amount our clients lost for all rights issues since May 2020,” Nithin Kamath told TheSpuzz Online.
Earlier this week, Nithin Kamath took to Twitter to inform investors that his new-age brokerage will now warn investors, who want to apply for Rights Entitlements (RE) on the platform, of the dangers involved. “Many retail investors buy Rights Entitlements without knowing that the value of REs will be zero if they don’t apply,” Nithin Kamath stated on Twitter. “Since May 2020 our clients have lost ~Rs 10 crore by buying Rights entitlements & not applying. We now have a nudge to warn customers,” he added.
Original allottees and secondary purchasers, each shed dollars
Rights Entitlements are credited in the Demat accounts of eligible shareholders of a firm going by means of a rights challenge. Beneficiaries who do not want to apply for the rights challenge can sell their REs to other investors wanting to get discounted shares in the corresponding rights challenge. Reliance Industries’ Rs 53,000-crore rights challenge in May 2020 was the initial in Indian share markets exactly where shareholders have been permitted to trade REs.
The Rs 10 crore that Zerodha customers have so far lost consists of each: i) investors shopping for REs from eligible shareholders, but not applying for shares inside the deadline, and ii) eligible shareholders neither applying for the rights troubles making use of their REs, nor promoting their REs in the stock industry, Nithin Kamath told TheSpuzz Online.
What are Rights Entitlements?
Rights Entitlements give an choice to the holders to get shares of the firm at discounted costs, as agreed in the rights challenge supply. REs are only credited in the Demat accounts of these prospects who are eligible, according to the supply, and are issued in a distinct ratio. In the Reliance Industries rights challenge, the ratio was declared at 1:15. This meant that the investors would be issued one RE for each and every 15 shares owned. Capital markets regulator SEBI in January 2020 announced that REs will be tradable on the stock exchanges.
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Eligible shareholders get REs for no further expense. “No money is charged to the shareholder receiving an entitlement in their account unless they subscribe to the issue at which point the process is similar to an IPO,” stated Yug Tibrewal, Research Analyst, Choice Broking.
“The price of the RE is determined by the market based on the discount from the current market price of the security,” he added. For instance, if a share is trading at Rs 10, and the firm has presented stocks at a discounted cost of Rs 8 in the rights challenge, then the RE would be worth about Rs 2, or more or significantly less based on the demand.
REs continue to be traded till the rights challenge is open. “Trading in RE shall begin on the date of opening of the issue and close at least four days prior to closure of the issue,” Makarand Joshi, companion, MMJC and Associates LLP – a corporate compliance – firm told TheSpuzz Online. If left unused, the RE lapses, according to SEBI norms.
What occurs to unused REs
“If investors fail to exercise RE then they will lose the right to buy rights shares and consequently will lose the value at which they could have bought rights shares at a discounted price,” Makarand Joshi stated. “If the REs are neither subscribed nor renounced then those right shares will never come into existence and accordingly market capitalisation will not increase to that extent.”
Further, the lapsed REs also work to the advantage of investors who want to apply for more shares than their RE credits. The lapsed REs are redistributed amongst the oversubscription to the rights challenge, enabling investors to get more shares than their RE holdings.