The Importance of Reading Offer Documents: A Cautionary Tale from a Rights Issue

We’ve all come across the familiar tagline: “READ THE OFFER DOCUMENTS PROPERLY BEFORE INVESTING”. It’s often repeated but not always followed, and failure to do so can result in significant financial losses. Let me share a recent experience where not reading the fine print led to investors losing their hard-earned money during a Rights Issue of a listed company. The offer document clearly stated:

“PLEASE NOTE THAT RIGHTS ENTITLEMENTS WHICH ARE NEITHER RENOUNCED NOR SUBSCRIBED ON OR BEFORE THE ISSUE CLOSING DATE SHALL LAPSE AND BE EXTINGUISHED AFTER THE ISSUE CLOSING DATE.”

To better understand this, let’s break down what Rights Entitlements (REs) are and how they work.

What are Rights Entitlements (REs)?

Rights Entitlements represent the number of Rights Equity Shares that an eligible shareholder is entitled to receive, based on the number of equity shares they hold as of the record date. In simple terms, if you hold shares in a company on the record date, you are entitled to subscribe to additional shares at a lower price, as determined by the Rights Issue offer.

A Simple Scenario: How It Works

For example, let’s say a company’s stock is trading at Rs 50 per share on the record date (referred to as X date), and the company offers new shares at Rs 40 each in a 1:5 ratio. This means that for every five shares you hold, you can buy one new share at Rs 40. If you don’t hold shares as of the record date, you are not eligible for this entitlement directly. However, you can still purchase Rights Entitlements (REs) in the stock market during the trading period and then subscribe to the shares at the discounted price.

Common Pitfalls: Misunderstanding REs

This is where the confusion begins for many investors. Often, REs trade at a small premium to the rights issue price—say, Rs 5 per RE in this example. Many investors see the Rs 5 price tag and mistakenly believe they are purchasing shares at a bargain price, unaware that REs are not the same as actual shares. These REs are just entitlements, and without subscribing to the new shares during the offer period, the REs will expire worthless after the issue closes.

Here’s what happens:

1. An investor buys REs at Rs 5, thinking they have acquired the company’s shares at a discounted rate.
2. The investor does not apply for the shares before the issue closes, and as a result, the REs lapse.
3. The money spent on purchasing the REs is lost, and the investor is left with nothing in their demat account.

Mistaking REs for Equity Shares

Another common mistake occurs when investors do not understand the distinction between REs and regular equity shares. On stock exchanges like BSE or NSE, REs are listed separately and denoted with a hyphen and the suffix "RE" (e.g., CompanyName-RE) to indicate that they are Rights Entitlements and not ordinary shares. These REs also have different ISINs (International Securities Identification Numbers) and scrip codes.

However, many investors overlook these differences, see a reputable company’s name with a lower price, and rush to buy the REs without realizing that they need to take further action (i.e., subscribing to the shares). When the REs lapse, they are left shocked and devastated, wondering why the shares never appeared in their demat account.

The Aftermath: Blame, Grief, and Lost Money

After realizing the mistake, frustrated investors often blame the company, the Registrar and Transfer Agents (RTAs), or even the entire financial system. But the reality is that the company has done nothing wrong. The REs were purchased in the open market, and the responsibility to subscribe to the new shares lay with the investor. The seller of the REs receives the money, and the entitlement expires, leaving the buyer with nothing.

The Takeaway: Educate Yourself Before Investing

This experience has taught me one valuable lesson: awareness is key. Investors need to educate themselves about the instruments they are dealing with before committing their money. It’s essential to understand that nothing in the financial world is offered for free or at a suspiciously low price without reason. Mistakes due to a lack of information can be costly.

In conclusion, I urge all investors to heed this warning: information is wealth. Don’t assume or rush when it comes to financial matters. Always follow the golden rule: “Caveat Emptor”—let the buyer beware.

And remember, READ THE OFFER DOCUMENTS PROPERLY before investing.

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Article Compiled by:-

~From the desk of CS Sharath

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.