How Reliance Rights Entitlements (RE) can be a profitable trade?

Shareholders whose names appear on the register of shareholder as on May 14, 2020 will get the credit of proportionate rights entitlements (RE) based on the holdings. Let us look at some basic details of the issue.

May 19, 2020 1:33 IST | India Infoline News Service
The Reliance Rights issue at Rs53,124cr in aggregate will be the largest rights issue in the history of Indian markets. This will be the first time that Rights Entitlements will be traded on a large scale in the secondary markets. Before we get into how to trade the Reliance Rights Entitlements (RE), let us look at some basic details of the issue.

Details of the Rights Issue Important Dates
Rights Entitlements to be credited to demat accounts Before 20th May
Rights issue open and close May 20th to June 03rd
Rights Entitlement (RE) renunciation to be completed by May 29th 2020
Date of allotment of rights shares June 10th
Partly Paid shares to be credited to demat account on June 11th
Date of listing of partly paid rights on exchanges June 12th
Terms of the Rights Issue Amount
Rights issue size and price 42.26cr shares at Rs1257 per share
Size of the Rights Issue Rs53,124cr
Rights entitlement ratio 1:15 (1 share for 15 shares held)
25% to be paid of the rights price on application Rs314.25 per share
Balance Rights Money to be paid on 25% in Jun-21 and 50% in Nov-21
Data Source: KFINTECH (RTA)

Will the rights shares trade along with the normal shares of RIL?

The rights shares will be partly paid. Only 25% of the rights money of Rs1,257 (i.e. Rs314.25) will be paid on application. Therefore, the shares will trade as partly paid shares with a separate ISIN number. Only when all the tranches of the rights issue are full paid will the shares start trading at par with the existing RIL shares. Effectively, we will now have two Reliance shares simultaneously trading in the stock market viz. RIL and RIL (PP). The RIL PP will be approximately trading at one-fourth the price of RIL normal shares.

How to handle the rights entitlements (RE)?

Shareholders whose names appear on the register of shareholder as on May 14, 2020 will get the credit of proportionate rights entitlements (RE) based on the holdings. The rights ratio is 1:15. That means; if you hold 1500 shares of RIL on the 14th of May, you are entitled to 100 shares of rights. However, even if you are holding 1505 shares of RIL, your rights entitlement will only be 100 shares. The excess shares will be considered in the event you apply for rights above your entitlement. To get the rights shares credited, you must exercise your RE to apply for proportionate shares along with the 25% payment. Alternatively, you can renounce the rights by selling the RE in the open market. Such rights can be renounced; either on-market or off-market.

Renouncing RE; on-market and off-market

RE can be renounced either on market or off market. Let us look at the on-market process first. The RE credited to your demat account (ISIN – INE002A20018) will be actively traded in the secondary market and they can be sold through your broker just like shares. However, this online market renunciation can only happen between May 20th and May 29th; not after that. The transaction will also be settled on T+2 bases but this will be on trade-to-trade (T2T). That means; intraday trading in RE is not permitted.
The other way is to renounce RE off-market. Such RE can be transferred directly to another demat account by way of an off-market transfer. Remember to tick  the off-market box when filling up the Debit Instruction Slip (DIS).

How will the Rights Entitlements (RE) be valued?

The rights entitlement is a wasting option just like a call option and the value of the option is dependent on the difference between the current market price of Reliance and the rights price. If the entire 100% was payable on application, then the value of the RE would be the difference between the market price and the rights price. However, in this case it gets a little more complicated as only 25% is payable on application and the balance in tranches.

Details 25% on application 25% in May 2021 50% in Nov 2021
Rights Price Rs1257
RIL CMP (19th May) Rs1450
Value of RE today Rs193
Value Receivable Rs48.25 Rs48.25 Rs96.50
PV factor (12% annually) 1.0000 0.893 0.847
Adjusted RE value Rs48.25 Rs43.09 Rs81.74
Indicative value of RE Rs173.08
Effective Yield 13.77%

The buyer of the RE will get the fully-paid up shares only by November 2021 and for the opportunity loss, they will expect to be compensated in the form of lower price. For the seller of the RE, the yield of 13.77% is still an extremely attractive return. However, in reality, the market price of RE not only depends on the price difference but also on the volatility of the RIL stock. That can be for a later date!

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