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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Introduction to the Securities Market

Investor Rakesh holds shares of a listed company that decides to raise funds by offering new shares only to its existing shareholders in proportion to their holdings at a stated price. Rakesh does not wish to subscribe. Which statement is correct about his position?

In a rights issue, Rakesh has a right, not an obligation, to subscribe. If he does not wish to, he may renounce the entitlement, for example by selling it in the rights entitlement window, or let it lapse. His existing shares are unaffected.

  1. AHe must subscribe or the company will cancel his existing shares
  2. BHe can renounce his entitlement in favour of another person, if the entitlement is renounceable, or let it lapseCorrect
  3. CHe automatically receives the new shares free of cost
  4. DHe can sell the entitlement only to the company's promoters

Explanation

In a rights issue, shareholders have the right but not the obligation to subscribe. Rights entitlements can be renounced, including by trading them on the exchange in the prescribed window, or allowed to lapse. Existing shares are never cancelled for not subscribing, and the shares are not free, so the other options are wrong.

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