The Securities and Exchange Board of India (Sebi) is changing the rules for rights issues, to make it more attractive for companies and investors. A rights issue is further issuance of capital by listed entities to existing shareholders.
In India, rights issues make investors happy, only next to getting bonus shares. Firms, too, prefer it as they do not have to sell the issue extensively and if shareholders are happy and the pricing is right, issues sail through comfortably.
But the timing and its effect on pricing makes firms wary of using rights issues. If a firm’s share price was to fall below the rights issue price, when the issue is open, investors would rather buy shares in the open market. Hence, firms favour qualified institutional placements or preferential allotment of equity shares. These are faster, cheaper and require fewer disclosures.
This is not the first time Sebi is changing rules governing rights issues. A year ago, it shortened the issue process, so that issues could be completed within 43 days instead of 109 days.
Now, the regulator is easing the kind of disclosures needed for a rights issue, shortening the pre-issue process too. Since listed companies report material developments to stock exchanges, issue quarterly results and also publish annual reports, there is sufficient information available to investors.
Therefore, firms can make do with minimum disclosures in their offer document, which reduces the time and cost involved in documentation. However, Sebi has also said that issue proceeds can be used only after the allotment is complete. Earlier, firms could use the money after getting 90% subscription. This is a dampener.
If rights issues are to gain parity with other forms of equity issuance, the time taken to complete the process has to be shortened further. A month and a half is a long time in today’s equity markets and sharp fluctuation in prices can affect issues, even after Sebi’s relaxed guidelines. Tata Motors Ltd and Hindalco Industries Ltd are two well-known examples in this category. Success of a rights issue is a mix of the discount to the market price and the market price prevailing when the issue is open.
Normally, firms would like to keep the window short and decide the price closer to the issue date. But rights issues have a peculiar feature: Shareholders can renounce their rights to other issuers, a process currently involving paperwork. This requires time to account for postal delays. Sebi had earlier considered the electronic route for rights entitlement so that processing could become faster. It seems a good idea to experiment with it so that rights issues can become faster, regaining popularity among both issuers and investors.
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