Detailed Process for Right Issue of Shares

Chapter IV : Section 62 (1) (a) of Companies Act, 2013

Right issue of shares is a process by which a company raises further capital. This is done by offering a right to the existing shareholder to acquire shares, usually at a lower price compared to its market value.

Companies Act states that whenever a company having share capital wants to raise further capital, then the existing shareholders have the right of first refusal  which means that the existing shareholders should be offered such shares first, and in case they refuse to buy them, then the same can be offered to outsiders. 

Section 62 (1) (a) of Companies Act, 2013 explains right issue as, 

• Issue of further capital
• By company having share capital
• By offering right to existing shareholders, as on the date of offer, to acquire shares 
• In proportion to their paid up share capital, as nearly as possible
• By sending a Letter of Offer.

Process- 

Pre Issue-

• Check if the Authorised Share Capital is enough to accommodate the right issue.
• If not, MOA needs to be altered by passing an Ordinary Resolution in General Meeting according to Section 61 of Companies Act.
• Decide the cut off date and price at which shares will be offered as right to shareholders.
• Prepare a draft Letter of Offer.
• Send notice of Board Meeting with agenda.

Issue Process-

1. Call Board Meeting and pass Board Resolutions for the following,

• Right Issue of shares.
• The quantum, ratio and price of shares offered on the right basis.

2. Decide the cut off date for ascertaining the names of the shareholders who will be eligible for the right issue offer.

3. Approve draft Letter of Offer.

4. File the Board Resolution in Form MGT-14 applicable. Not required in case of a private company.

5. Issue Letter of Offer to the existing shareholders, as on the cut off date, at least 3 days before the opening of issue. In the case of a private company, such a period can be reduced by consent of 90% shareholders in writing/ electronic form.

6. The issue shall be open for a period of minimum 15 days to a maximum of 30 days. However,  the said offer period can be of a shorter duration, but it shall not be less than 7 days.

7. Receipt of application money in the bank account.

8. Conduct Board Meeting, for the following,

• Finalising list of allottees.
•  Authorising filing of Form PAS-3.
• Authorising issue of certificate of securities to the allottees.
• Authorising making entries in the Register of Members.

Post-Allotment-

• File Return of Allotment within 30 days of allotment in Form PAS-3.
• Make stamp duty payment on shares so issued.
• Issue certificates in form SH-1 within 2 months of allotment.
• Make necessary entries in the Register of Securities in the Register of Members in Form MGT-1.

Points to remember:

• Unless articles provide otherwise, the shareholders have a right to renounce the shares offered to them to any other person, whether in part or full.
• The said right to renounce shall be mentioned in the letter of offer.
• The letter of offer should also mention the numbers of shares offered.
• The letter of offer should be sent by registered post, speed post or by electronic mode with proof of delivery.
• The shareholders may accept, reject or renounce the offer in full or in part.
• Shareholders resolution not required for right issue of shares.
• Valuation is not required for shares issued by way of right issue.
• In case of a private company, the offer period can be shorter than that specified, where 90% of shareholders have given their consent.
• Subscription money should be received before close of offer.
• If the offer is not accepted within the offer period, it will be deemed to have been rejected.
• The Board of Directors may dispose of the shares not accepted or rejected by the shareholders, as per their discretion, in such a manner which is not disadvantageous to the company or shareholders.
• The existing shareholders do not have the pre-emptive right in such shares that were not accepted or rejected, when reissued by Board.
• Right issue is not considered to be a public issue even if the members renounce their rights to non-members.
• In case where transfer of shares is pending, then the right attached to such shares shall be kept in abeyance until such transfer is registered by the company. 

Forms Summary-

Conclusion-

From an issuer perspective, right issue is a convenient option for fund raising as shareholder resolution, valuation report, separate account opening, etc. activities are not required as against in case of private placement. It is also beneficial from a shareholder / promoter’s perspective, a right issue does not result in dilution of shareholding.

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Disclaimer: The information provided is for educational purposes and should not be considered as professional advice. The author shall not be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.