Vide SEBI circular number SEBI/HO/CFD/DIL2/CIR/P/2020/13 dated January 22, 2020. SEBI has taken an important step for Streamlining the Process of Rights Issue by introducing dematerialized Rights Entitlements (REs). In this article, I have tried to give a brief light on the concept and its practical applicability for listed entities and investors to the concept of Dematerailzed Rights Entitlements and I have not detailed much about the Right issue process.
In a rights issue, a company gives us the right to apply for additional shares based on the number of shares already held by us. The company may issue these shares either to fund a new project, reduce debt, or strengthen its equity capital base. In this concept of Right Entitlements, the eligible shareholders will receive the RE in their demat accounts before the rights issue opens. The RE will be in the form of temporary demat securities which will lapse if not renounced/exercised. Even if a shareholder holds physical shares, he has to specify his demat account details to the Issuer company / Registrar to the Issue so as to receive the REs not later than two working days prior to the issue closing date, such that credit of REs in his demat account takes place at least one day before the issue closing date.
If the demat account of a shareholder is frozen or demat account details are not available, including shares held in an unclaimed suspense account or in the account of IEPF Authority, then REs shall be credited in a suspense escrow demat account of the Company and an intimation should be sent to such shareholder by the issuer /Registrar to the issue.
In the letter of offer and the abridged letter of offer, the issuer company shall disclose the process of credit of REs in the demat account and renunciation thereof. In the REs process, the REs with a separate ISIN shall be credited to the demat account of the shareholders before the date of opening of the issue, against the shares held by them as on the record date.
The depositories shall put necessary procedures in place for the issue and credit of REs in demat mode. The issuer making a rights issue of specified securities shall ensure that it has made necessary arrangements with depositories to issue and credit the REs in demat mode in the demat accounts of shareholders holding shares as on the record date. Further a separate ISIN shall be obtained by the issuer for credit of REs.
The issuer shall specify the ISIN for REs while announcing the record date. Based on the rights entitlement ratio, the issuer shall credit REs in dematerialized mode through corporate action to shareholders holding shares as on record date. The ISIN of REs shall be kept frozen (for debit) in the depository system till the date of opening of the issue. In the case of fractional entitlements of REs, the fractional part shall be ignored by rounding down the entitlement.
The issuer shall submit details of total REs credited to the stock exchanges immediately after completing the corporate action for the same and shall obtain requisite trading approval from the stock exchanges. The details with respect to shareholder entitlement shall be made available on the website of the Registrar to the issue and the investors shall be able to check their respective entitlements on the website of the Registrar by keying their details, after adequate security controls to ensure that investors’ information is made available only to the particular investor. The issuer shall also carry these links on their website.
The issuer shall intimate issue closing date to the depositories at least one day before the issue closing date, and the depositories shall suspend the ISIN of REs for transfers, from the issue closing date. REs which are neither renounced nor subscribed by the shareholders shall lapse after the closure of the Rights Issue.
Issuer Company shall ensure that REs which are lapsed are extinguished from the depository system once securities are allotted pursuant to Rights Issue. Once the allotment is done, the ISIN for REs shall be permanently deactivated in the depository system by the depositories.
The stock exchanges shall put necessary procedures in place for the trading of REs on the stock exchange platform. REs credited to demat account can be renounced either by sale of REs using stock exchanges platform or off-market transfer and such trades will be settled by transferring dematerialized REs through depository mechanism in the same manner as done for all other types of securities. For the sale of REs through the stock exchange, investors can place orders for the sale of REs only to the extent of REs available in the demat account of the investor. Trading in REs on the secondary market platform of Stock exchanges will happen electronically on a T+2 rolling settlement basis where T is the date of trading. The transactions will be settled on a trade-for-trade basis.
The issuer shall inform the dates of issue opening and closing to the stock exchanges and the depositories at the time of filing the letter of offer with the stock exchanges. Trading in REs shall commence on the date of opening of the issue and shall be closed at least four days prior to the closure of the rights issue.
Shareholders will be able to sell their REs like we sell stocks from our holdings, but one cannot be able to transact the REs intraday as they will be settled on a trade-to-trade basis. Securities Transaction Tax (STT) at 0.05% of the value of RE is levied on the seller of the RE.
These guidelines could be considered as an effort from the side of the regulator for giving more emphasis to digitalization and to make the process of the right issue more streamlined. Hence now it is inevitable for all investors to have a demat account if they want to claim the benefit of the Right Issue in the form of Dematerialized Rights Entitlements.
The author can also be reached at dhilipnkumar@gmail.com
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