Rights issue has been a preferred mode of raising capital from the existing shareholders of a company as there are no prescriptive conditions on the issue price. Companies have the flexibility to determine issue price in case of rights issue under company law as well as SEBI regulations (applicable to listed companies). This gives companies much-needed flexibility to structure a capital raise from existing investors, especially in times of need.
In the rights issue, the new shares are being issued and offered to the existing shareholders of the company at a discount to the current market price.
The shareholders have the right but not the obligation to subscribe to the newly issued share in proportion to their existing holdings.
They also have to check out the record date and ex-date for the subscription. Beyond which the subscription becomes null and void.
Section 62 of the Companies Act, 2013 regulates the process of rights issue and also provides the pre-emptive right to the shareholders to subscribe to such shares. Therefore, the right issue acts as a formal invitation from the company to its existing shareholders to buy additional shares.
Key Objectives for Right Issue of Shares
The Key Objectives for the Rights Issue of shares are as follows:
- The Rights Issue is done to increase the subscribed capital of the Company.
- The shares are issued to the existing shareholders of the Company in proportion to their current share capital issued earlier.
- The Rights Issue is done by sending a letter of offer to the shareholders of the Company.
- The notice of the issue of shares should be sent to the shareholders by offering them an option to take the shares offered to them.
- The shareholders should answer the notice within 15 days or a maximum of 30 days.
- The shareholder does not respond to the Company’s notice of issuing shares; then the offer will be deemed to be declined by the shareholders.
- The notice of shares issue should be sent through registered post or speed post or any electronic mode to the shareholders.
The Reason behind issuing the Rights Issue
By issuing the Rights issue, the Company gets sufficient funds and besides gives the right to the existing shareholders of the Company to purchase the shares at a discounted price. Apart from raising the Capital of the Company, The Rights issue bestows other advantages like-Provides ease for raising Fund, Converting the unsubscribed share capital to the Subscribed share capital of the Company, Favourable method of raising the Capital which results in expansion without Debt.
Conditions relating to Rights Issue
A company needs to fulfill the following conditions before undergoing the process of Rights Issue:
- Every unlisted company making the offer of the rights issue needs to get its securities converted into a dematerialized form. The KMP (Key Managerial Personnel), Directors and Promoters hold these securities as per the provisions of the Depositories Act, 1996;
- Any shareholder who intends to subscribe to the shares offered also needs to get their securities converted into dematerialised form;
- A company needs to check whether its authorised capital is enough to issue the right shares. If not, then the company needs to alter the capital clause of its MOA (Memorandum of Association)
- A company needs to verify whether the AOA (Article of Association) authorises the issue of the right shares or not. If not, then the company also needs to alter AOA by including the provision of the right issue;
- A company can issue the right shares only to the shareholders of the company.
Who can apply for Right Issue?
As per section 62 of the Companies Act, 2013 the following entities can apply for the Right Issue:
- Existing Shareholders: A company can issue the right shares to its existing shareholders in proportion to their shareholdings by sending them a letter of offer. However, a company needs to fulfil the following conditions for issuing rights shares:
- A company needs to send a letter of offer to the shareholders specifying the number of shares offered. The shareholders must accept the offer in a minimum of 15 days and a maximum of 30 days;
- If the shareholders do not accept the offer within the prescribed period, the same offer stands declined;
- The letter of offer also includes a right to renounce the shares offered in favour of some other person;
- After the expiry of the prescribed period or on receipt of an intimation from the shareholder regarding their rejection to the shares offered, the BOD (Board of Directors) may dispose of the shares in a manner advantageous to both the company and shareholders.
- Employees: A company can issue the right shares to its employee under a scheme of ESOP (Employee Stock Option Plan) by passing a special resolution and complying with specified conditions.
- Any other person: A company can also issue the right shares to any other person by passing a Special Resolution either for cash or for consideration other than cash. However, the registered valuer determines the price of such shares by making a valuation report subject to prescribed conditions.
Procedure for Rights Issue
According to Section 62 (1) of the Companies Act 2013, the procedure for the issue of shares is as follows:
Issue of notice of Board meeting:
According to Section 173(3) of the Companies Act 2013, the notice for the board meeting has to be sent a minimum of 7 days prior to the board meeting and must specify the agenda for the meeting.
Convene the First Board Meeting:
The Board meeting is held, and the resolution for issuing rights shares is passed. The rights issue does not require the approval of shareholders, and hence the board can proceed towards the issue.
Issue Letter of Offer:
On the passing of the resolution, the letter of offer is issued to all shareholders, and the same is sent through registered post or speed post. For shareholders to accept the offer a window period of 15 – 30 days is given that is to say the maximum time the shareholders can take to accept the offer is 30 days and the minimum period is 15 days. The offer is considered declined if it is not accepted before the expiry period. The offer must be open at least three days after the issue of the letter of offer.
File MGT – 14:
After the passing of the board resolution, the company must file the MGT -14 within 30 days of passing the Board Resolution. The form MGT 14 is mandatory for a public limited company. A true certified copy of the Board Resolution needs to be attached to MGT 1
Receive application money:
The shareholders must send the accepted application along with application money.
Convene the Second Board Meeting:
The company must convene the second board meeting, the notice of which must be sent 7 days prior to the board meeting. The required quorum must be present, and the resolution for the allotment of shares must be passed. On passing the resolution for allotment of shares, the allotment of shares must be done within 60 days of receiving the application money for the same.
File the forms with ROC:
The company must file the Form PAS -3, within 30 days from the allotment of the shares with the Registrar of Companies. The certified true copy of the Board Resolution and the list of the allottees must be attached to the form. Additionally, the MGT – 14 must be filed for both the allotment and issue of shares.
Issue of Share Certificates:
The share certificates must be issued; if the shares are in Demat form, then the company must inform the depository immediately on the allotment of shares. If the shares are held in physical form, then the share certificates must be issued within 2 months from the date of allotment of shares.
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