Issue of securities by a private company – Rights & Bonus issue

Monisha Jain

As per section 23(2) of the Act, a private company (‘the Company’) can issue securities in either of the following manners-

– by way of a private placement (section 42); or

– by way of a rights/ bonus issue

Rights issue and issue of bonus shares by a company is governed by the provisions of section 62 and 63 of Companies Act, 2013. Further, a company can also issue additional share capital as per the provisions of section 62.

Bonus issue

• Issue of bonus shares is regulated by the provisions of section 63 of the Companies Act, 2013
• A company can issue bonus shares to its existing equity shareholders in a proportion as may be determined by the Board of Directors of the company based on the availability of adequate resources.
• A company can issue bonus shares by utilizing the available balances in the following accounts-
  – securities premium account;
  – capital redemption reserve; and
  – its free reserves
• Any reserve created by revaluating the assets of the company should not be utilised for the purposes of issuing bonus shares.
• In order to issue bonus shares, all the shares should be fully paid up. In case there are any partly paid shares, the same needs to be made fully paid up. Further, the issue of bonus shares should be authorised by the articles of association of the company. Additionally, the company should not have defaulted in meeting its dues in relation to any debt or any statutory dues.
• The bonus issue should not be made in lieu of dividend

Rights issue

• Rights issue of shares is regulated by the provisions of section 62(1)(a) of the Companies Act, 2013
• Rights issue of shares means issue of equity shares by the company to its existing equity shareholders at a price favourable to the shareholders ie a price lesser than the current market price. Rights issue should be made by the company exclusively to its shareholders.
• Rights issue should be made in proportion to the number of shares held by each shareholder ie it should be made to all the shareholders and not to a selected group of persons.
• Rights issue is made by way of a letter of offer issued and circulated by the company to its shareholders. The letter of offer should contain details of the rights issue ie the number of shares offered, price at which they are offered, the offer period.
• The offer period should not be lesser than 15 days and should not exceed 30 days.
• Unless the articles of association provide for a specific restriction on the renouncement of the rights by a shareholder to a third person, the same shall be allowed.
• The offer should be accepted within the offer period else it is considered to have been declined by the shareholders.

Subsequent issue of securities other than by way of rights/bonus issue or private placement

• A company can issue securities to its employees under the Employees Stock Option Plan subject to the approval of its shareholders by way of a special resolution.
• A company can also issue shares to any other persons provided the issue of securities is authorized by way of a special resolution and that the issue is made at a price determined by undertaking a valuation of the company by an independent valuer.
• Further, it has been provided under section 62 that the conversion of any debentures or loans into shares of the company by exercising the options attached to such debentures/ loans would not be considered as subsequent or additional issue of securities.
• The Central Government is authorized to issue directions to the company to which it has provided loans to convert such loans into the shares of the company under such terms and conditions as it deems necessary if the same is in public interest. While determining the conditions of the conversion, the Central Government shall take into consideration the financial position of the company.
• Where the company considers that the terms and conditions determined by the Central Government are not reasonable, an appeal can be made to the Tribunal against such directions of the Central Government. The Tribunal, after considering the rationale of the Central Government behind making such directions and analysing the impact of the conditions made on the company, pass an order as it deems fit.
• Also, if the conversion as directed by the Central Government mandates an increase in the authorised share capital of the company, the same shall be increased by an amount equivalent to enable the conversion.