Rights issue: Lull after 3 stormy years, mop-up Rs 2,867 crore in CY22

Mop-up Rs 2,867 cr in CY22, as against Rs 25,335 cr in same period last yr

Equity capital raise via rights issue has seen a sharp deceleration this year due to lack of big-ticket transactions and volatility in the secondary market. So far this calendar year, six companies have raised a cumulative Rs 2,867 crore. This includes the just-concluded rights offering of Suzlon Energy. During the same period last year, eight companies had mopped up Rs 25,335 crore through rights issue and 18 companies had raised a record Rs 64,603 crore in 2020.

In fact, the fundraising through rights issues in the first 10 months of 2022 is the lowest since 2016 during a similar period.

A 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. Further, as promoters put money themselves, it helps in sending a positive signal to investors.

Raising funds through rights issues was a common practice in the 1990s. And, according to Prime Database, between 1990 and 1996, 240 rights issues, on average, were launched every year.

However, over the last decade, qualified institutional placements (QIPs) or preferential allotments were preferred to raise fresh capital or issue shares to promoters. The pricing for QIPs is guided by the pricing formula prescribed by the Securities and Exchange Board of India, which is linked to the prevailing market price.

"It is one or two large issues that have skewed the numbers in the last few years. Rights, as a fundraising route, have no longer been preferred for many years. There could be some large issues every now and then. But major fundraising is unlikely to happen through rights issues,” said Pranav Haldea, managing director, Prime Database.

"QIPs don't have as many limitations and place the security much faster compared to a rights issue. QIP as an instrument is a lot more nimble,  compared to a rights issue. Rights are a good instrument when promoters want to subscribe or you want to price it in a manner that permits more people to participate. QIP has stringent pricing criteria," explained one investment banker.

Some experts blamed the tumultuousness in the secondary market for the lower number of issues.

"We have a very volatile secondary market. Pricing a rights issue has also become difficult though it's usually priced at a discount to the market price. You can't be certain of when to launch a transaction when there is so much volatility.  I don't see any major jump going forward," said Pranjal Srivastava, partner-investment banking, Centrum Capital.

The benchmark Nifty50 has swung wildly this year amid global volatility triggered by aggressive monetary tightening by the US Federal Reserve.