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Rights Entitlement (RE) is the number of new shares that the shareholder of a company is eligible to subscribe under the Rights Issue offer of that company.
In other words, Rights Entitlement is given to a shareholders of a company listed in the exchange and that company which is coming up with a rights issue. The shareholders can subscribe to the rights issue, or sell it to other interested investors.
Rights Issue is one of the ways a company raises funds. Through a rights issue, a company makes an offer to existing shareholders to buy additional shares in the company at a discounted price (rights offer price) during the period set by the company.
Rights Entitlement is calculated and offered to shareholders based on a ratio of existing equity shares held as on the record date.
RE are credited to the demat account of eligible shareholders in dematerialized form.
Just because RE is credited to demat account, it does not mean shareholders own the extra shares. They have to exercise this entitlement to subscribe to the rights issue as and when it is announced by the company.
Shareholders who are eligible can either subscribe to the rights issue partly or fully. They can even let the offer lapse by not opting to exercise their rights to purchase the additional shares.
In addition, shareholders can renounce/transfer/sell their Rights Entitlement to other people in two ways.
(i) On Market Renunciation:
Shareholders can renounce the Rights Entitlements, credited to their respective demat accounts by trading/selling them on the secondary market platform of the Stock Exchanges through a registered stock broker in the same way equity shares are traded.
(ii) Off Market Renunciation
Renunciation of Rights Entitlement can be sold by off-market transfer through a depository participant. The Rights Entitlements can be transferred in dematerialised form only.
Eligible shareholders must make sure that renunciation through off-market transfer is completed so that the Rights Entitlements are credited to the respective demat account of the buyer on or before the Rights Issue closing date.
Investors like you should know that the REs that you sell on the exchange, are compulsorily delivered (T+2 days) and intra-day trading in RE is not possible.
To make the most of the REs, it is better for an investor who has received the RE to subscribe to the company’s rights issue or trade it in the secondary market to other interested investors. Otherwise, he or she loses the opportunity to buy the shares at a discounted price during the rights issue period. They also lose the opportunity to make money by trading the REs.