Fundraising through rights issues sprint in 2023, but QIPs maintain lead

Year sees revival in rights issues, with 11 companies raising Rs 7,168 crore, eclipsing previous year's total of Rs 3,884 crore by 10 companies

Fundraising through rights issues experienced a revival this year, with slightly larger transactions hitting the markets.

In 2023, 11 companies raised Rs 7,168 crore through rights issues, compared to 10 companies that raised Rs 3,884 crore in the previous year.

The 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.

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.

Rights issues are often used by firms when the promoter group intends to maintain its shareholding. As promoters invest their own money, it helps send a positive signal to investors.

Raising funds through rights issues was a common practice in the 1990s.

According to PRIME Database, between 1990 and 1996, an average of 240 rights issues were launched every year.

However, qualified institutional placements (QIPs) have gained favour in the recent past among listed companies to raise capital.

Bankers said fundraising through rights issues has been lacklustre, apart from some large issues skewing the numbers in some years.

“Companies raise capital through rights issues when markets are somewhat bearish and stock prices are low. QIPs are much faster to do, and there is an appetite for good QIPs in the current market. The first preferred route when a company needs capital in a bull market will be QIP,” said Ajay Garg, founder and managing director (MD) of Equirus Capital.

Pranjal Srivastava, partner in investment banking at Centrum Capital, said whether a company opts for rights or some other mode fundamentally depends on whether promoters want to subscribe or not.

“Rights also involve a reward for investors. It’s at a discount from the market price. If you need an external investor for some reason, you go for a QIP,” Srivastava said.

Abhijit Tare, MD and chief executive officer of Motilal Oswal Investment Advisors, states that when it comes to rights issues, companies have to convince a much larger group of investors compared to QIPs.

“For garnering demand in a QIP, you can speak to a bunch of institutional investors and get the demand. But for rights, you may have to reach out to thousands of shareholders. Marketing the issue is much more difficult,” said Tare.

Tare added that the influx of retail money through mutual funds has increased the appetite for QIPs.

Rights issues are likely to be tepid going forward, as bankers are expecting another year of double-digit returns.

“Generally, rights issues happen when markets are tepid. That’s when you go to a broader set of investors and garner demand. Even the promoters also put in money since shares are available at a discount; even promoters don’t want to dilute their stake, whereas QIPs are buoyant market products,” said Tare.