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Suresh Krishnamurthy

SEBI's proposal to allow trading in rights and buybacks is promising. Such trading can provide valuable information to market participants — especially, retail investors — about the value of rights and buybacks.

THE possible introduction of dematerialised trading of `rights' and `buybacks', mooted by SEBI in a recent concept paper, is exciting. The move could usher in greater price discovery in the case of rights offers. In buybacks and tender offers, the move will lead to greater convenience to shareholders.

Unearthing value: Without trading in the right to apply for shares in a rights offer, it is difficult to establish the value of the rights. Rights are similar to call options. They give their holder the right to apply for shares at a particular price.

The inability to establish the value of rights could pose a problem for retail investors, as they often cannot decide whether to subscribe to a particular rights offer.

If rights trading commences, it should help retail investors decide for themselves if they should subscribe to the offer or sell the rights. Specifically, trading of rights will help unearth the value of rights offers

that are priced closer to the market price

of companies which are on the verge of a turnaround or restructuring, and

of complex instruments such as convertible preference shares.

Aiding price discovery: Take, for example, Bihar Caustic's rights offer. The offer was priced closer to the market price.

Anyone familiar with the financial performance of Bihar Caustic would have decided not to participate in the rights offer. But they would have been surprised by the post-rights surge in the company's share price.

Had the rights been traded, the vigorous trading that succeeded the rights offer may have manifested in rights trading. And investors may have known more about the value of the rights of Bihar Caustic.

Or, take the rights offer of convertible instruments made by Television Eighteen. What is the present value of the convertible instruments? Rights trading would have captured the value in detail. Even had it not captured the value accurately, it would at least have put a number on it, helping investors take a decision.

Convenient buybacks: Buybacks are possible through many routes, including through the market or through a tender offer. Buyback through the tender offer route lends itself to trading. Buybacks are similar to put options. The value of the put options would be the difference between the market price and the buyback price.

If put options are distributed proportionately to shareholders, the problem of proportionate allotment will vanish. Shareholders will no longer have to surrender all their shares to ensure that a portion of the shares is accepted. There will no longer be a class of shares that is not accepted in the buyback process.

Now in lucrative buybacks, the proportionate allotment ensures that a portion of shares is locked in and subject to possible post-buyback price decline. This is because investors can trade the puts in the market and derive the same benefit. Similar trading of puts in open offers will also help retail investors.

Undistorted prices: Trading of rights and buybacks also has other advantages. Since the value of rights and buybacks are separated from the stock, the price of the stock will not be prone to wild movements when the trading of the options is in progress. Now, in attractively priced rights and buyback offers the stock price initially surges and then dips sharply after the event.

The stock price will move and gyrate ahead of the allotment of the options. However, since the ex-rights or ex-buyback price will be known when the options are being traded, investors will know the value of the options and can decide better.

Overall, trading in rights and buybacks can provide more information to retail investors. It can only be hoped that SEBI allows it as early as possible.

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