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Saturday, September 25, 2021

Explained: What Bharti Airtel’s raising money through rights issue means for the company

Bharti Airtel is raising additional capital from existing shareholders at a time when there are talks of a financial bailout package for the telecom sector.

By: ENS Economic Bureau | New Delhi |
Updated: August 31, 2021 8:18:10 am
Bharti Airtel is raising additional capital from existing shareholders at a time when there are talks of a financial bailout package for the telecom sector | Reuters/file

The board of directors of Bharti Airtel has approved the company’s plan to raise up to Rs 21,000 crore by way of a rights issue. The company’s chairman, Sunil Bharti Mittal, will chair an investor call on Monday to apprise investors of the rights issue.

What is a rights issue and how does it work?

Under Company Laws, a rights issue is one of the many ways in which a company can raise additional capital when they need it. A rights issue gives investors the option, or a right to buy new shares of the company at a discount to the current market price.

Only existing shareholders of a company can participate in the rights issue. This means that instead of going to the general public at large, only the existing shareholders of the company can buy additional shares in the company if they so wish to.

Companies also declare a rights entitlement ratio when declaring a rights issue. For example, if a company declares an entitlement ratio of 1:4, it means that for every four shares that a shareholder already has, they can buy one more share in the rights issue.

In most circumstances, since the number of shares of the company in the market increases, the market price of the share is diluted. In some cases, however, if there is a belief that the funds being raised through the rights issue are for a positive intent and may help the company in the short or long run, the stock price as well as the market capitalisation of the company increases.

What does Bharti Airtel’s raising money through a rights issue mean for the company?

Bharti Airtel’s board has approved raising up to Rs 21,000 crore by way of a rights issue. For every 14 shares held by the existing shareholder, they will be allowed to purchase one share.

The company is raising additional capital from existing shareholders at a time when there are talks of a financial bailout package for the telecom sector, where two of the three telecom companies are facing massive payouts over the next decade due to the adjusted gross revenue judgment from the Supreme Court.

While Bharti Airtel is slightly more comfortable than its peer Vi (Vodafone Idea) when it comes to the AGR payouts, a financial package would still help the company. With the additional capital, Bharti Airtel is likely to go for expansion of its current capacities to compete with its rival Reliance Jio Infocomm in the 5G market, according to analysts. The company, however, has not disclosed the reasons for the fundraising.

This is the third round of fundraising done by Bharti Airtel over the last three years as it has raised close to Rs 42,000 in the right issue, qualified institutional placements and foreign currency convertible bonds during 2019-2020.

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