Summary: The rights issue of shares is a method under the Companies Act 2013 that allows companies to increase their share capital by offering new shares to existing shareholders in proportion to their current holdings. Governed by Section 62(1)(a), this process enables shareholders to maintain their ownership percentage in the company. The procedure begins with the Board of Directors convening to pass a resolution and approve the offer letter, which must be sent to shareholders at least three days before the issue opens. Shareholders have 15 to 30 days to accept the offer, after which the company collects the application money and convenes another Board meeting to allot the shares. Following the allotment, the company must file Form PAS-3 with the Registrar of Companies (ROC) within 30 days and issue share certificates to shareholders within two months. Key considerations include ensuring the authorized share capital is sufficient to accommodate the new issue. If not, the company must increase its authorized share capital before proceeding. The rights issue ensures equitable distribution of shares, allowing shareholders to retain their voting rights and control in the company.
INTRODUCTION:
Under Companies Act 2013, there are several modes of increasing the share capital of the Company for various purposes like expansion or new projects, etc. Rights issue is one of the most convenient method of increasing the share capital of the Company. As per Section 62 (1) (a) of the Companies Act 2013, Rights issue is an invitation to the existing shareholders to buy new shares in proportion to their existing shareholding.
PROCEDURE FOR RIGHTS ISSUE OF SHARES UNDER THE COMPANIES ACT 2013:
1. Convene Board meeting for issue of shares: In this meeting of the Board of Directors of the Company shall pass the resolution for issue of right shares and will place the offer letter for its approval.
2. Letter of offer, once approved, will be issued to all the existing holders of the equity shares of the Company.
Letter of offer should specify the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer, within which the offer, if not accepted, shall be deemed to have been declined.
The company must dispatch the Letter of Offer to all existing shareholders on the record date, at least 3 days before the opening of issue. Further, unless the articles of the Company otherwise provide, the offer contains the right of renunciation.
3. Receive application money: The Company will receive the application money from the shareholders who have accepted the offer.
4. Convene Board meeting for allotment of shares: Once application money is received by the Company from the existing shareholders, the Board of directors shall convene a Board meeting in order to allot the shares to the existing shareholders.
5. Filing of PAS-3: After allotment is completed, Company is required to intimate ROC about it by filing Form PAS-3 within 30 days of allotment of shares.
6. Issue of share certificates: At the end, the Company shall issue share certificate to the shareholders within 2 months from the date of allotment.
7. Entry in Register: Make the necessary entries in the register of Members in Form MGT-1.
OTHER KEY POINTS
Other key point(s) and factors for Rights issue of shares are:
1. Before proceeding for Rights issue, evaluate the Authorized share capital of the Company in order to determine whether it is sufficient to accommodate the proposed share rights issue.
2. If the existing share capital is sufficient then the Company can proceed with the proposed rights issue as per the procedure described as above and if in any case the existing Authorized share capital falls short, then the Company needs to increase its Authorized share capital in order to accommodate the proposed Share capital.
Procedure on increasing the Authorized share capital of the Company is described in my article for which link is provided as: https://taxguru.in/company-law/guide-increase-authorised-share-capital-company.html#
3. Documents required for filing Form PAS-3:
-
- Certified true copy of Board resolution for allotment of shares
- List of allottees stating their names, address, occupation, if any, and number of securities allotted to each of the allottees.
(Please note that the signatory for certifying the Form PAS-3 and list of allottees should be a same individual).
CONCLUSION: Rights issue is a procedure governed by Companies Act 2013, which gives the existing shareholders a right to maintain their ownership in the Company by subscribing to the fresh shares which ensures equitable distribution of Shares and do not in any way affect their voting rights.
*****
Disclaimer: The entire contents of this editorial have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, users of this information are expected to refer to the relevant existing provisions of applicable Laws. In no event the author shall be liable for damages resulting from the use of the information. This shall not be treated as solicitation in any manner or for any other purposes whatsoever.
The author of this editorial is the founder of AAKRITI GUPTA & ASSOCIATES (Practicing Company Secretary) firm based in Noida and can be reached out at [email protected].
Author Bio
