Introduction of E-trading of Right Entitlement September 17th 2008

RIGHT ISSUE
A rights issue is basically when a company offers existing shareholders a right to purchase additional shares of the
company at a given price, which is at a discount to the prevailing market price of the stock, to make the offer
enticing for the shareholder and to ensure that the rights offer is fully subscribed to.

It must be noted that in case of a rights issue, a shareholder has the option of applying for additional shares also
i.e. over and above what he is entitled to. Thus, assuming that some of the shareholders do not exercise their right,
the shareholders who have applied for additional shares are allotted the same.

Since, in the case of a rights issue, additional equity is issued, the issuing company's equity base rises to the extent
of the issue. Thus, considering that the number of equity shares of the company has increased, there is a
proportionate fall in the stock price of the company reflecting the new adjusted earnings per share (EPS).

Why companies come out with Right Issues?

The basic premise of carrying out rights offers is to raise additional capital. The company raises money from its
existing shareholders, who have seemingly posed their faith in the company by virtue of being its shareholders, to
invest in expanding capacities or to explore other investment opportunities. This in turn provides the company
better leveraging opportunities. A higher equity capital base would assist the company to raise higher debt. This is
because a company's debt-to-equity ratio would stand reduced, putting the company in a comfortable position to
raise further debt from the market.

While some may argue here that the company's return on equity (ROE) would get adversely affected and it would
be wise to raise debt from the markets at competitive costs without leveraging on additional equity raised from
shareholders, the former argument (debt-equity) cannot be discarded.

Troubled companies typically use rights issues to pay down debt, especially when they are unable to borrow more
money. But not all companies that pursue rights offerings are shaky. Some with clean balance sheets use them to
fund acquisitions and growth strategies. For reassurance that it will raise the finances, a company will usually, but
not always, have its rights issue underwritten by an investment bank.

So in crux, the main advantages of a rights issue are that it leads to increased liquidity and affordability of the
stock owing to reduced stock price and higher equity base.

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Introduction of E-trading of Right Entitlement

What option investors have in response to a Right Issue?

The rights are normally a tradable security themselves (a type of short dated warrant). This allows shareholders
who do not wish to purchase new shares to sell the rights to someone who does. Whoever holds a right can choose
to buy a new share (exercise the right) by a certain date at a set price.

Shareholders essentially have three options when considering what to do in response to the rights issue.

Subscribe to the rights issue in full: - Some shareholders may choose to buy all the rights they are
offered in the rights issue. This maintains their proportionate ownership in the expanded company, so that
an x% stake before the rights issue remains an x% stake after it. To take advantage of the rights issue in
full, an investor need to spend some extra money for every share that are entitled to the investor under the
right issue. The discount on the newly issued shares provides a benefit of bringing down their average
spending on that particular stock. The value of each share will be diluted as a result of the increased
number of shares issued.

Ignore your rights:- Others may choose to sell their rights, diluting their stake and reducing the value of
their holding. If rights are not taken up the company may (and in practice does) sell them on behalf of the
rights holder. In such case, investors need not to pay any extra money and let their rights expire. But this
not normally recommended.

Sell the rights to someone else:- Rights that can be traded are called "renounceable rights", and after
they have been traded, the rights are known as "nil-paid rights". To determine how much you may gain by
selling the rights, you need to estimate a value on the nil-paid rights ahead of time. It is possible to sell
some rights and exercise the remainder. One possibility is selling enough rights to cover the cost of
exercising those that are not sold. This allows a shareholder to maintain the value of a holding without
further expense (apart from dealing costs).

SEBI’s action regarding Right Issue

Reduced Time frame

Capital market regulator SEBI is working on a proposal to keep the rights issue process short and simple. The
SEBI move is primarily aimed at making the process attractive enough for corporates and to discourage them
from taking the easy route of private placements.

Recently, SEBI announced that the timeline for a rights issue was being reduced from 109 days to 43 days. The
concept of a small declaration instead of a prospectus with detailed disclosures, which will outline what an issuer
plans to do with the funds raised through a rights issue, could be considered. The rationale for the move is that
since the offer only has to be made to the existing shareholders, the company does not need to provide details
which it would have given in its prospectus at the time of initial public offer and later in the form of annual
reports

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Introduction of E-trading of Right Entitlement

Streamlining the trading through Electronic Process

After amending its guidelines to reduce the time line for rights issues, capital markets regulator SEBI has now
proposed electronic trading of rights entitlements (RE) through stock exchanges. In the proposed process, the REs
will be credited into the individual shareholder’s demat account. Currently, the process involves physical
renunciation of REs.

The electronic process is intended to minimise manual intervention in the rights issue process, and to improve its
efficiency. “The electronic rights issue process shall apply to shareholders who have an active demat account and
hold shares in demat form as on the record date of the rights issue.

Electronic Rights Issue Process

Eligible shareholders would be entitled to proposed right issue after the record date. Company will issue a
letter to each shareholder informing that the rights entitlements have been credited into their respective
Demat accounts and duration of trading in RE and attaching the Letter of Offer and a Blank Application
Form (unlike the present form which has shareholders’ name and entitlement printed on it) to all the
shareholders on the record date.

The Registrar, on the instruction of the issuer, shall through credit corporate action; credit the RE in the
given ratio into the Demat accounts of the eligible shareholders and that will be open for subscription and
renunciation/trading of RE electronically through the stock exchange platform.

The trading in REs will close three working days before the closure of the rights issue, to avoid last
minute rush and also to ensure that beneficial owner gets sufficient time to submit the entitlement
applications to the issuer company.

Shareholders, who do not want to exercise their RE, can renounce their RE by selling their REs on the
electronic trading platform of stock exchanges. The shareholders who have not renounced their RE and
the renouncees who don’t want to renounce their RE further shall apply for shares against their RE during
the issue period (which includes the trading period of RE) by submitting the application form received
with the Letter of Offer/downloaded blank application form or by submitting the required information on
a blank paper and submit the requisite payment instrument to Bankers to the issue (i.e. as per the current
practice )

After the trading and settlement, the list is prepared of the respective numbers along with their numbers of
REs and thereafter the registrar shall reconcile the application by matching the numbers of REs applied
with the number of available in RE in their Demat’s account so as to allot the actual number of REs to all
the eligible shareholders.

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