Rights Entitlements Hit Indian Exchanges This July

A handful of Indian companies will bring their Rights Entitlements to the bourses this month as the subscription windows open. The RE segment trades separately from the underlying stock for roughly a week, giving eligible shareholders a chance to sell their entitlement or buy more before the issue closes.

Zerodha, India's largest stock broker by active clients, expects its own rights issue to enter the RE trading window later in July. The broker, which charges among the lowest brokerage rates across futures, options, equities and commodity trading on the NSE and BSE, will credit REs to shareholders of record on the issue's record date. Those REs will trade under a separate symbol during the subscription period and then lapse if not exercised.

The RE mechanism is simple. Each RE represents the right to buy one new share at the rights-issue price, which is typically set below the market price. When the market price stays above that issue price during the RE window, the RE trades at a positive value – roughly the difference between the two prices, adjusted for any fractions. When the market price slips below, the RE can trade at a discount or become worthless.

Shareholders who want to take up their full entitlement can simply pay the issue price before the deadline and receive the new shares a few weeks later. For those who do not want to put in more capital, the RE window offers an exit. Selling the RE on the exchange captures some of the issue's discount without having to fund the purchase.