Rights issues are often utilized by listed companies as a route to raise capital when stock markets are sluggish and new investors may be loath to make fresh investments. The previous year was a case in point when rights issues gained traction and 12 listed companies raised about Rs. 52,000 crores (significant jump compared to Rs. 18,826 crores raised in 2018), with telecom companies leading the pack.

Subject to certain conditions, rights issues are freely priced, and shareholders' participation in rights issues is generally driven by the incentive to acquire stock at a price lower than trading price, a fact that most issuers consider when pricing the rights issue. Recent instances, however, show that once the terms of the rights issue are announced, the trading price of stock begins to converge and gradually reduces the incentive for shareholders to participate. Besides, until the issue closing, the company's stock continues to be prone to macro uncertainties.

Any kind of capital raise through issue of securities by listed companies, be it by debt or equity, comes under the supervision of SEBI. Over the last few years, SEBI has introduced several significant regulatory changes relating to the primary markets, including for rights issues. In addition to reducing the period it typically takes to complete a rights issue, SEBI has recently mandated that the 'rights entitlements' (REs), i.e., the ratio of shares that a shareholder can subscribe in a rights issue based on their shareholding on a record date fixed for this purpose, should be carried in an electronic form and deposited directly in the demat account of such shareholder. These changes have come in the form of recent amendments to the SEBI's regulations on capital raise and disclosures by listed companies. The procedural matters were separately specified under a circular issued in January 2020.

In terms of the process, the timelines have been reduced for several matters, primarily in respect of prior announcement of the record date, from seven to three working days. Further, under the old regime, information relating to REs used to be printed on the application form before dispatch to the shareholders. Some companies, either based on directive from regulatory authority or for commercial considerations, allowed their shareholders to trade in the REs on stock exchanges, while its settlement used to be physical. Under the revised framework, since the REs can only be electronically credited, a shareholder of physical shares is required to inform the issuer company details of their demat account before the start of the subscription period. A shareholder can subsequently choose to participate in the issue or renounce their REs (either completely or partially) through sale on the stock exchanges or off-market transfer. Settlement of REs on stock exchanges will be on a T+2 basis, similar to normal trading. REs which are neither renounced nor subscribed will lapse after the closure of the subscription period.

Another important change under the revised framework is that 'application supported by blocked amount' (ASBA) as a payment mode has been made compulsory for all applicants in a rights issue. Previously, renouncer/ renouncees could subscribe in a rights issue only through non-ASBA payment modes and their applications were physically verified. Even retail shareholders were allowed to apply through non-ASBA payment modes. The idea behind making ASBA mandatory seems to enable faster completion of the post issue formalities, given that ASBA as a process allows an applicant to block the application money in their bank account (which is debited at the time of allotment), instead of an application accompanied with cheque/ demand draft.

Overall, the changes introduced in the revised regime are positive. Redundancies associated with physical settlement and verification processes will be eliminated and rights issues will be completed in a shorter period. There are, however, certain other aspects of rights issues which require regulatory/legislative intervention. The Companies Act, 2013, for example, might need some tweaking to address the challenges associated with delivering rights issue offering materials to non-resident shareholders where such distribution may be locally regulated. SEBI may also look to rationalize disclosure standards in rights issue offering documents, specifically with respect to company's litigations which extends to certain superficial disclosure requirements such as issues of moral turpitude and economic offences, considering that company undertaking a rights issue is already a listed company and is subject to routine disclosures of all material events, including litigations. Lastly, SEBI may bring the UPI payment mechanism for rights issues, like for IPOs, to make the issue process more efficient in terms of time and procedure.

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