Returns of rights issue subscribers a mixed bag since ’19

Returns from rights issues conducted since 2019 have been a mixed bag for investors. Over the past 16 months, domestic markets have seen 15 entities raise fresh equity capital to the tune of ~56,000 crore via rights offerings. Shares of only six of these are trading above their issue price.

Rights issue is a mechanism available for listed firms to raise money by offering existing shareholders new equity shares. The new shares are typically offered at a discount to the prevailing market price, to incentivise investors to subscribe.

Investors who participated in Bharti Airtel’s rights issue in May last year have seen their money more than double. On the other hand, Vodafone Idea’s shares are currently 66 per cent below their issue price. Both telecom giants had mopped up close to ~25,000 crore each, via their respective rights offerings.

Shares of Piramal Enterprises and Tata Sponge Iron (now Tata Steel Long Products) are currently down 24 per cent and 53 per cent, respectively, over their issue price.

While all the 15 companies had offered shares at an encouraging discount, the slump in markets this year has spoilt the returns scorecard for both investors and promoters. Rights issues aren’t as popular as some other instruments like qualified institutional placement (QIP) or institutional placement programme (IIP) for fresh fund raising. However, it is often used by firms when the promoter group intends to maintain its shareholding. Further, as promoters have to pump in money themselves, it helps in sending a positive signal to investors.

Market experts say that besides considering the discount, investors should also look at the prospects of the firm before deciding to participate.

If an existing investor doesn’t intend to participate in the rights offering, there is an option to renounce the shares in favour of others.