What is right entitlement?
A Right Entitlement (RE) is issued by a company to its existing shareholders, giving them the right to buy additional shares at a predetermined price. These entitlements are allocated based on the number of shares held as of the record date and can be subscribed, sold, or allowed to lapse.
Shareholders can use REs as follows:
Subscribe to the rights issue – Shareholders can use the RE to buy additional shares.
Sell the RE on the exchange – If they do not wish to apply, they can trade the RE in the secondary market within the exchange-specified period.
Let the RE lapse – If not exercised or sold before expiry, the RE will become worthless.
Risks of trading REs
Illiquidity – REs may have low trading volume, making it difficult to buy or sell.
High volatility – Prices can fluctuate significantly due to demand and supply.
Expiry risk – If the RE is not exercised or sold before expiry, it will become worthless.
Non-refundable investment – Buying REs does not guarantee share allotment if the rights issue application is rejected.
Example:
Suzlon Energy Ltd. issued a rights issue in the ratio of 5:21 (5 REs for every 21 shares held). The RE was available for trading between 11th October and 14th October.
Existing shareholders could sell their REs on the exchange for a nominal profit if they did not want to apply for the rights issue.
New investors (non-shareholders) could buy REs from the market before 14th October to participate in the rights issue.
Unutilised REs held in a Demat account expired worthless after the trading window closed.
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