Context

In the times of Coronavirus pandemic, several companies are planning to raise funds (aggregating to over Rs 10,000 crore) through rights issue amidst the Covid-19 pandemic.

About

• A rights issue is a mechanism by which companies can raise additional capital from existing shareholders.
• While existing shareholders may not necessarily be able to participate in other fund-raising mechanisms like QIPs, preferential allotment etc, rights issue is a more democratic approach to raising funds as it allows the existing shareholders the right to invest first in the company.

Why rights issue is an ‘efficient’ option?

• For a rights issue, there is no requirement of shareholders’ meeting and an approval from the board of directors is sufficient and adequate.
• Therefore, the turnaround time for raising this capital is short and is much suited for the current situation unlike other forms that require shareholders’ approval and may take some time to fructify.
• Thus the rights issue are a more efficient mechanism of raising capital.

Recent reforms undertaken for rights issue:

• Streamlined process: In November 2019, SEBI streamlined the rights issue process and the timelines for completion was significantly reduced from T+55 days to T+31 days — a 40 per cent cut in the time.
• It has also reduced the advance notice for the record date from seven working days to three working days.
• Dematerialised REs framework: In a major move that makes it possible for eligible investors to subscribe and trade their rights entitlement (RE) and also makes it possible for interested investors to subscribe to more shares than they are eligible for, Sebi on January 22, 2020, laid down the detailed procedure of the improved rights issue process and the dematerialised REs framework.