First issue since introduction of trading platform that allows eligible shareholders to sell their entitlement
Reliance Industries’ (RIL’s) mega rights issues will put to test the platform for trading rights entitlement (RE) introduced by market regulator Securities and Exchange Board of India (Sebi) earlier this year.
The platform allows eligible shareholders renunciate their shares for a price. Industry players say in case of RIL, the shareholders can look to pocket as much as 15 per cent of the value eligible shares.
Until now, shareholders, who didn’t wish to apply, had to let their RE lapse or had to transfer it for free. The trading in RE will open, along with the rights issue, on May 20 and close on May 29. Meanwhile, the rights issue will remain open till June 3.
“The right entitlement process is new for all market participants and will be tested in a big way,” said Mohit Mehra, business analyst at Zerodha.
Exchange officials and brokers said systems have been put in place for trading in rights entitlement. The dematerialised (demat) accounts of eligible shareholders have been credited with a new international securities identification number (ISIN), which will act as a separate security and can be traded on the exchange platform, they said.
Despite being a new mechanism, experts feel RE trading will generate enough interest given RIL’s over 2.6 million shareholders.
“Given the diverse shareholding in RIL, one can expect the rights entitlement trading platform to be fairly liquid. The trading will happen like it does in any other share. However, participants will not be allowed to trade intra-day,” said Mehra.
At Rs 53,125 crore, RIL’s rights issue will be India’s biggest-ever equity fund raise. RIL shareholders will be able to apply for one share in the rights issue for every 15 shares held as on May 14.
Experts said the yield eligible shareholders can generate will depend on the differential between RIL’s share price in the secondary market and the rights issue price.
RIL shares on Monday closed at Rs 1,444, down 1 per cent. The stock currently trades at a 14 per cent discount to the rights issue price of Rs 1,257.
“The value of the RE in a fully paid rights issue would be the difference between current market price and rights price. At this level the buyer and seller of RE would break even,” Kotak Investment Banking said in a note.
However, RIL is issuing part-paid shares, the RE pricing dynamics could change.
“Now we need to factor in the partly-paid dynamic. The buyer is only getting 25 per cent of the value of the renunciation price (Rs 200 difference between current price and issue price) on listing. However, if he pays 25 per cent of the value to the RE seller (Rs 50), then a value of Rs 152 is forever lost to the seller. To normalise the same, the buyer should pay Rs 150, discounted by one year at an appropriate rate. If we assume a discounting rate to be in the range of 12 per cent to 14 per cent, the proportionate value of the three-fourth portion will be Rs 131 to Rs 134. So the buyer should pay a theoretical fair value of Rs 181 to Rs 184 (Rs 50 upfront and (Rs 131 to Rs 134) to the seller in exchange of the REs,” as per the Kotak note.