ISSUE OF SHARES THROUGH RIGHT ISSUE
DEFINITIONOF RIGHT ISSUE
‘Right Issue’
means offering shares to existing members in proportion to their existing
shareholding. The object is, of course, to ensure equitable distribution of
Shares and the proportion of voting rights is not affected by issue of Fresh
shares.
A rights issue is an invitation to existing
shareholders to purchase additional new shares in the company. This
type of issue gives existing shareholders securities called rights.
With the rights, the shareholder can purchase new shares at a discount
to the market price on a stated future date.
Section 62 of the Companies Act, 2013, deals with
further issue of capital and prescribes the principle of pre-emptive right of
shareholders to subscribe to the rights shares. Shares offered to the existing shareholders
are called 'right shares'. The issue of the letter of offer accompanied by the
application form indicating there in the number of shares offered for
subscription is an offer from the company making the
FEATURES of Right
Issue:-
- Companies undertake a rights issue
when they need cash for various objectives. The process allows the company
to raise money without incurring underwriting fees.
- A rights issue gives preferential
treatment to existing shareholders, where they are given the right (not
obligation) to purchase shares at a lower price on or before a specified
date.
- Existing shareholders also enjoy
the right to trade with other interested market participants until the
date at which the new shares can be purchased. The rights are traded in a
similar way as normal equity shares.
- The number of additional shares
that can be purchased by the shareholders is usually in proportion to
their existing shareholding.
- Existing shareholders can also
choose to ignore the rights; however, if they do not purchase additional
shares, then their existing shareholding will be diluted post issue of
additional shares.
Reasons for a Rights Issue:-
- When a
company is planning an expansion of its operations, it may require a huge
amount of capital. Instead of opting for debt, they may like to go for equity to
avoid fixed payments of interest. To raise equity capital, a rights issue
may be a faster way to achieve the objective.
- A project
where debt/loan funding may not be available/suitable or expensive usually
makes a company raise capital through a rights issue.
- Companies
looking to improve their debt to equity ratio or looking to buy a new
company may opt for funding via the same route.
- Sometimes
troubled companies may issue shares to pay off debt in order to improve
their financial health.
Checking
points:-
·
That every unlisted public company making
any offer for issue of any securities, before making such offer has
dematerialized of its securities held by its promoters, directors, key managerial
personnel in accordance with provisions of the Depositories Act, 1996 and regulations
made thereunder.
·
That any person who subscribes any
securities has dematerialized his all existing securities of the company before
such subscription.
·
Whether the authorized share capital is
sufficient for issue of shares through right issue and if authorized capital is
not enough, then first alter the capital clause of the memorandum of
association of the company.
·
Whether articles of association authorise
for issue of shares through right issue and if not, then first alter the
articles of association to include provisions for issue of shares through right
issue.
·
That shares are offered to persons, who at
the date of the offer, are equity shareholders of the Company, in proportion to
the paid-up share capital on those shares.
The provisions and procedures relating to issue of shares through right
issue are as follows:
|
S. No. |
Particulars |
|
1. |
Prepare the list
of existing shareholders, along with details of shares, and ascertain the
number of shares which can be received by them on the right issue basis. |
|
2. |
Prepare draft
share application form, draft offer letter for right issue and the letter of
renunciation. |
|
3. |
·
Prepare notice of board meeting along with draft
resolution(s) to be passed in the board meeting. ·
Send notice of board meeting to all the directors Ø at least 7 days
before the date of board meeting or Ø in such manner
as prescribed under section 173(3) of the Companies Act, 2013 and clause 1 of
the Secretarial Standard-1. |
|
4. |
Convene board
meeting to pass the following resolutions: ·
Approving letter of offer and application form. ·
Approving issuance of Shares through Right Issue to
existing shareholders. ·
To fix the record date, the ratio of shares and the
price of shares to be issued. ·
Authorisation to Director/Company Secretary to sign
the documents. |
|
5. |
Prepare draft
minutes of the board meeting and circulate, within a period of fifteen days
from the date of conclusion of that meeting, to all directors, by hand/speed
post/registered post/courier/e-mail or by any recognised electronic means,
for their comment(s). |
|
6. |
File e-FormMGT-14
(in case of public company as private companies are exempted to file
board resolution in respect of issue of shares through right issue) with the
Registrar of Companies within 30 days of passing of board resolution. |
|
7. |
Send or dispatch
letter of offer to all existing shareholders through registered post or speed
post or electronic mode or courier or any other mode having proof of delivery
at least 3 days before opening of issue. The letter of offer shall specify
the number of shares offered and offer shall be open for a minimum period of
15 days to maximum period of 30 days. (The period of 3 days and 15 to 30 days
may be shorter if 90 % shareholders have given their consent for shorter notice
period in case of private limited company). The exemption to private limited
company is subject to that the said private limited company has not committed
a default in filing its financial statement and annual return with the
jurisdictional Registrar of Companies. |
|
8. |
After receiving
acceptance, renunciation or rejection of right from the shareholders, along
with share application money, call another board meeting by sending board
meeting notice at least 7 days before the date of board meeting. |
|
9. |
Ensure that
securities are to be allotted within 60 days from the date of receipt of the
application money and if the company fails to allot securities, has to repay
the application money to the subscribers within 15 days from the date of completion
of 60 days and in case the company fails to repay the application money
within the aforesaid period, the company is liable to repay application money
along with interest at the rate of 12% p.a. from the expiry of the 60thday. |
|
10. |
Prepare list of
shareholders: ·
who have renounced their shares ·
who have not subscribed or denied the offer of right
issue. ·
who have subscribed shares in excess of the
entitlement under right issue. |
|
11. |
Convene board
meeting within 60 days of receipt of application money to pass the following resolution: ·
Allotment of shares to the persons applied for
shares. ·
Authorisation for issue share certificates. ·
Authorisation for making entries in Register of
Members. |
|
12. |
Prepare draft
minutes of the board meeting and circulate, within a period of fifteen days
from the date of conclusion of that meeting, to all directors, by hand/speed
post/registered post/courier/e-mail or by any recognised electronic means,
for their comment(s). |
|
13. |
Prepare list of
allotees for filing with the Registrar of Companies. |
|
14. |
File e-Form
PAS-3 along with attachments with the Registrar of Companies within 30
days of allotment of shares. |
|
15. |
Make necessary
entries in the register of members within seven days after passing of board
resolution for allotment of shares. |