RIL mega issue to put Sebi's 'rights entitlement' platform to test

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 the Securities and Exchange Board of India (Sebi) earlier this year.

The platform allows eligible shareholders to renunciate their shares for a price. Industry players say in the case of RIL, the shareholders can look to pocket as much as 15 per cent of the value of 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 until 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 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 as 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 equity fundraising. 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 premium to the rights issue price of Rs 1,257.

“The value of RE in a fully paid rights issue would be the difference between the current market price and the rights price. At this level the buyer and the seller of RE would break even,” Kotak Investment Banking said in a note.

However, RIL is issuing part-paid shares and the RE pricing dynamics could change.

“Now we need to factor in the partly-paid dynamics. The buyer is only getting 25 per cent of the value of the renunciation price (Rs 200 difference between the current price and the issue price) on listing. However, if he pays 25 per cent of the value to the RE seller (Rs 50), 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)  to the seller in exchange of RE,” according to the Kotak note.