Rights issue: REFEX-RE doubles in three trading sessions

Refex Industries is engaged in the business of refilling non-ozone depleting refrigerant gases, popularly known as hydrofluorocarbons (HFCs). It is used in air-conditioners, refrigerators, and refrigerating equipment and is presently in news for its rights issue.

The rights issue is priced at around 11 per cent discount to its closing price on July 23, 2020. However, that is not why it's in the limelight. It is the REFEX-RE or the Refex Industries Rights Entitlements Ltd, listed on NSE that is grabbing investors’ attention. REFEX-RE has risen nearly 100 per cent in just three trading sessions.

Memories of Reliance Industries' rights issue are still fresh in investors’ minds. While it was not the first time that any company had raised capital via rights offer but it was indeed the first time that the rights entitlements were credited to its shareholders’ Demat account directly, to be traded eventually on the exchange platform.

In its fresh circular, SEBI has attempted to make buying and selling of rights entitlement (REs) easy and simple. Investors should not be surprised if REs become a popular mode amongst corporates to raise capital.

Rights entitlement demystified:

Rights entitlement (RE) is nothing but the number of new shares that a shareholder of a company is eligible to apply for, under the rights offer. REs are based on a ratio of existing shares held. For example, the ratio for REFEX rights offer is 5:14, i.e. for every 14 shares held of Refex Industries, investors are entitled to apply for five shares of the company at the predefined discounted price. These five shares are nothing but RE in this case.

Usually, it used to take close to a couple of months to complete the entire process of rights offers from the date of issue to the listing. Securities and Exchange Board of India (SEBI) has streamlined the steps for rights issues and has effectively brought it down to 31 days by making them electronic.

With the new streamlined process, the REs are now directly credited to the Demat accounts of the shareholders before the issue opens. This part of the process is taken care of by the registrar & transfer agents (RTA) of the issuer, who have the Demat account details of the company’s shareholders.

With this system in place, it has enabled the ‘easy trading of REs’. Now, the shareholders, who are not interested in subscribing to the issue can sell their entitlement to those who are interested in buying those entitlements, at a traded price of course as these REs are listed on the stock exchange just like ordinary shares.

Investors should note here that REs, just like ordinary shares have unique security identification numbers or ISIN. Refex Industries’ REs symbol on NSE is REFEX-RE and its ISIN is INE056I20017.

Advantage of RE:

The biggest advantage of the new process is that the investors can subscribe to rights over and above the entitlements with REs traded on bourses. The whole process is more transparent when it comes to the renunciation of rights and the timeline is reduced considerably with the right entitlement platform. Investors can renounce the REs credited in Demat accounts by selling them on bourses or off-market transfers. Once REs is sold on bourses for e.g. on NSE, they are delivered on T+2 days. Also, the intraday trading of REs is not possible.

While there is an ease of buying and selling of these entitlements, investors ought to remember that the volatility will be extremely high on bourses for such REs. Hence, caution is advised before taking exposure to REs.