Rights offers are a good option for listed entities to raise funds from existing shareholders. But in recent times, companies have been increasingly turning to preferential allotments and qualified institutional placements, due to the ease in fund-raising through these channels. SEBI’s move to provide greater flexibility in rights issues, discussed in a recent consultation paper, could make rights offers an attractive option for listed entities.
Data from SEBI show that the number of rights issues was a tenth of preferential allotments in FY24, while the funds raised were about one third of that raised from the latter. A similar trend is evident in earlier years. Rights issues need to be made more palatable; they provide a low-cost funding option to companies and allow them to reward existing shareholders by offering shares at a discount to market price. Rights issues also promote long-term investing. But there are two main reasons why companies are moving away from these issuances. One, the cumbersome and long-drawn process laid down by the regulations and two, the constraints faced by promoters in renouncing their rights entitlement.
The consultation paper points out that the average time for a rights issue is 317 days in the case of non-fast track issues. Regulations require that the draft letter of offer prepared by the merchant banker should contain all material information necessary for the investor. The compilation of this offer letter, along with the necessary clearance from SEBI and the exchanges, seems to be responsible for much of the delay. The fact is that such a detailed offer letter is unnecessary as listed companies disclose all material information to the stock exchanges. The regulator’s idea of doing away with the requirement to file the draft letter of offer and getting it cleared by SEBI is a good suggestion. Minimising the information in the letter of offer to objects of the issue, number of shares issued, the rights ratio, promoter’s participation and the time-frame to complete the issue should suffice. The suggestion that the role of merchant bankers can be dispensed with is, however, debatable. The issuer may not possess the skill to arrive at the valuation or the rights ratio.
The proposal to allow promoters to renounce their rights in favour of select investors is a sound move. It will ensure that the offer sails through without any hitch, and also allows promoters who are willing to dilute their stake to let strategic investors into the company. The condition that the promoters need to make upfront disclosure about this renunciation through media advertisement will check surreptitious entry of entities related to the promoters into the company. Similarly, giving the company the right to allot the unsubscribed portion of the non-promoter shares to select investors will help reduce uncertainty around these issuances.