Introduction
A shareholder’s right to engage in an issue is regarded as a rights issue. Current shareholders have preemptive rights as a result of their status. The offer must be made to current shareholders on a proportionate basis to their stakes in this rights issue. The shareholders who are provided the opportunity to subscribe may or may not do so. They have the option of subscribing to the offer in part or whole.[1] A separate resolution is not required for shareholder approval of a right issuance. The Board has sole authority in fixing prices of the securities, which does not have to be calculated using a recognized valuer’s assessment.
Section 62 of the Companies Act, 2013 describes a situation in which the company’s authorised capital has not been depleted and the unsubscribed portion of the capital is used to issue further shares. [2] The allocation of shares under Section 81 is a type of contract that involves the firm making an offer of allotment to current shareholders first, and the owners to accept the offer either personally or by renouncement. The company can manage with shares whose allotment has not been accepted by existing shareholders and/or renounced in any way the directors feels is beneficial for the company. [3]
Unsubscribed Shares
Unsubscribed shares are shares of rights offering equities that have not been promptly, duly, and legitimately subscribed for and purchased for in line with the appropriate right offering processes by the holders of permitted note claims. [4] The Board of Directors has ultimate authority over the allocation of the unsubscribed component of Rights Equity Shares, and the Board may distribute the unsubscribed portion to any individual, whether or not an existing shareholder of the Company, without regard to preference. Allotment will be made inside the total dimensions of the Issue if there is an oversubscription. [5]
The Act states that a firm’s Board of Directors may distribute unsubscribed shares in a way that would be “not dis-advantageous to the shareholders and the company.” The directors were allowed to distribute the unsubscribed rights issue shares “in such manner as they think most beneficial to the company” under Section 81(1)(d) of the 1956 Act corresponding to Section 62(1)(a)(iii) of the Act.[6] The “Notes on Clauses” in the Companies Bills and the Parliamentary Standing Committee Reports provide no explanation for the considerable change from “most beneficial” to “not disadvantageous.”
Analyzing what is really helpful to the company gives the Board greater authority, whereas identifying something that is not disadvantageous to the company and the shareholders are much more practical – because it reduces the Board’s burden of proof in such instances. The Gujarat High Court found in the case of In Re: Mafatlal Industries Ltd[7], that the Board’s ability to discharge extra shares deriving from an inability to conform by shareholders or through abandonment seems to be very broad under the 1956 Act, and that the Board can even sell excess shares to non-members. It was also decided that the law does not set a time restriction for the Board of Directors to receive subscriptions for the sale of residual shares.
If the qualified shareholders of a company to whom a rights issue proposal is made either drop the proposal or just don’t adhere to the allocated time frame as indicated in the rights issue notification, the company’s Board of Directors is authorised under Section 62(1)(a)(iii) of the Act to try to get rid of the unsubscribed shares in a way that is not unfavourable to the company or its shareholders. The assignment of unsubscribed shares to 3rd party investors who aren’t even existing owners of the company is one of the most favoured methods for disposing of unsubscribed shares.
As a result, “the next issue is whether the Board is bound to apply Section 42 of the Act, that governs private placements of equities when allocating the unsubscribed equities of the rights issue to a third party. However, the Act is blank on the mechanism enabling third-party distribution of unsubscribed shares.[8]”For the specific objective of handling and disposal of the unsubscribed fraction of the shares provided to qualified shareholders by a company through a rights issue, Section 62(1)(a) of the Act, which controls the structure for rights issues, a company is not allowed to conform to the rules of Section 42 of the Act. The phrasing of Section 62(1)(a)(iii) permits the Board to dispose of shares at its discretion, which “is not disadvantageous for the company and shareholders.”
Despite Section 62(1)(c) of the Act, which stipulates that “subject to conformity with the applicable requirements of Chapter III and any other conditions as may be prescribed,” Section 62(1)(a) of the Act contains currently no specific limiting words. Furthermore, the Reasoning to Rule 13 of the Share Capital Rules states that the term “Preferential Offer” refers to a company’s preferential issue of shares or other equities to any individuals or groups, and “does not include shares or other securities offered through the right issue.” As an outcome, the assignment of unsubscribed shares to a third party under Section 62(1)(a) of the Act can be claimed to be distinct from “private placement” and “preferential allotment” under the Act.
Given the broad meaning of a “public issue,” companies must exercise caution when launching rights offering to confirm that the unsubscribed fraction of the company’s equity shares is not disposed of by its Board of Directors by offering or encouraging to subscribe to, and thus assign to not more than 200 people in total.
Conclusion
Overall, the article discussed about who has the power regarding the allotment of unsubscribed shares and the related provisions along with case law. The board’s power to allot unsubscribed equities to issue rights to a non-shareholder is unfettered under Section 62 of the Act, as long as the allocation is not detrimental to a company or its shareholders. However, the Act is silent on how unsubscribed shares can be distributed to third parties. The provision regarding the same is required to be added to the Act to avoid any sort of confusion in the allotment of unsubscribed shares.
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References:
[1] Geeta Saar, “Rights Issue”, ICSI, <https://www.icsi.edu/media/portals/86/geeta%20saar/Geeta_Saar_26_Rights_Issue_-1.pdf> accessed 01 September 2021.
[2] Aditya Rajagopal, “Analysing the aspect of the Further Issue of Share Capital under the Companies Act”, <https://blog.ipleaders.in/further-issue-of-shares/> accessed 02 September 2021.
[3] In Re: Mafatlal Industries Ltd. v. Unknown, (1996)87 CompCas 705 (Guj.).
[4] “Unsubscribed Shares definition”, <https://www.lawinsider.com/dictionary/unsubscribed-shares> accessed 02 September 2021.
[5] Ms Anjali Aggarwal, “Rights Issue: A Recuperative remedy amid Covid-19 pandemic”, Corporate Professionals, <https://www.corporateprofessionals.com/articles/rights-issue-a-recuperative-remedy-amid-covid-19-pandemic/> accessed 31 August 2021.
[6] Proddaturi Malathi v. SRP Logistics Pvt. Ltd, Company Appeal No. 08 of 2018.
[7] In Re: Mafatlal Industries Ltd. v. Unknown, (1996)87 CompCas 705 (Guj).
[8] Bharat Vasani, Esha Himadri & Varun Kannan, “Rights Issue- Is the Board’s Discretion to allot unsubscribed shared absolute?” Cyril Amarchand Mangaldas (2021)<https://corporate.cyrilamarchandblogs.com/2021/08/rights-issue-is-the-boards-discretion-to-allot-unsubscribed-shares-absolute/> accessed 01 September 2021.
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This article is written by Aayush Akar, Student, National Law University Odisha and Debayan Samanta, Student, KIIT School of Law, Odisha
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