Rights Entitlement (RE) is a mechanism used by companies to raise additional capital by offering existing shareholders the right to purchase new shares or other securities, typically at a discounted price, before the company offers them to the general public. This process is known as a rights issue. The REs are allotted to shareholders in proportion to their existing holdings on a specified record date, allowing them to maintain their proportional ownership in the company.

Here's a detailed breakdown of how Rights Entitlement works:

1. Announcement of Rights Issue: The company announces its intention to raise capital through a rights issue. This includes details such as the number of new shares to be issued, the price at which they will be offered, and the ratio of new shares to existing shares (e.g., 1 new share for every 5 existing shares).

2. Record Date: The company sets a record date to determine which shareholders are eligible to receive the rights entitlements. Shareholders who own the company’s shares on this date are entitled to participate in the rights issue.

3. Issuance of Rights Entitlements (REs): Eligible shareholders receive REs, which represent their right to subscribe to the new shares. For example, if a shareholder holds 100 shares and the rights issue ratio is 1:5, they will receive 20 REs (100 shares / 5 = 20 REs).

4. Trading of REs:In many markets, REs can be traded on the stock exchange. Shareholders who do not wish to subscribe to the new shares can sell their REs to other investors. This provides flexibility and potential liquidity for the shareholders.

5. Subscription Period: Shareholders can use their REs to subscribe to the new shares during a specified subscription period. They must pay the subscription price for the new shares they wish to purchase.

6. Allocation of New Shares:After the subscription period ends, the company allocates the new shares to those who exercised their rights. If not all new shares are subscribed, the company may offer them to other investors or underwriters.

The key benefits of a rights issue include allowing existing shareholders to avoid dilution of their ownership and giving the company a relatively quick way to raise capital. However, shareholders must decide whether to exercise their rights based on the potential value and future prospects of the company.

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