Right Issue of Shares Under Companies Act 2013 & Rules

Concept  of Right Issue of Shares Under Companies Act 2013, Applicable Rules & Sections for Right Issues under Company Law, Conditions for the offer of Right Share to existing equity shareholders, Forms to be filed with ROC for Issue of Right Shares, Step-wise Procedure for Right Issue of Shares, Penalty for failure to adhere with provision of right issue and FAQ’s on Provisions related to Right Issue under Company Law-

1) Concept  of Right Issue of Shares Under Companies Act 2013

a. ‘Right Issue’ means offering shares to existing members in proportion to their existing share holding. The basic idea is to raise fresh capital.

b. Right issue is generally availed by small companies where the power of shareholding retains with the shareholders of company.

c. It can also be defined as the “pre-emptive right” that a shareholder has in the Company in preference to an outsider.

d. Any company can go for right issue be a private company, public, listed or unlisted company.

e. With the rights the shareholders can purchase new shares at a discount to the market price

f. Section 62(1)(a) of Companies Act, 2013 talks about Right Issue

“Section 62(1)(a) deals with issue of Further shares shall be offered to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:—

(i) the offer shall be made by notice specifying 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;

(ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right;

(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company;”

2) Applicable Rules & Sections for Right Issues under Company Law

3) Conditions for the offer of Right Share to existing equity shareholders

Check the following conditions are put in the offer letter for offering shares to existing shareholders of the company

a. Unless the articles of the company otherwise provide, the notice of offer shall contain a statement of right to renounce.

b. Check if the offer specifies the number of shares offered and confirms that the issue is open for at least 15 days and is not kept open for more than 30 days

c. Check if the clause pertaining to non acceptance of offer within a specified time, would be deemed to be denial of offer is put in the offer letter

d. Check if the offer includes a right to renounce the shares in favour of any other person

e. Check if the offer states that, in case the shares are declined after the expiry of the time mentioned in the notice or by an earlier intimation from the person to whom the notice was given, the board of directors may dispose of the shares in a manner not disadvantageous to the shareholders and the company.

4) Forms to be filed with ROC for Issue of Right Shares

5) Stepwise Procedure for Right Issue of Shares

6) Penalty for failure to adhere with provision of right issue

If any company and directors fails to adhere with provision of right issue, there is no direct penal provision is given in the governed provision.

However as per section 450 of the Companies Act, 2013 where no specific penalty or punishment is provided in the Act, the company and every officer of the company who is in default as defined under section 2(60) or such other person shall be punishable With fine upto Rs.10,000/- and further fine upto Rs.1,000/- for every day after the first during which contravention continues

7) FAQ’s on Provisions related to Right Issue under Company Law

a. Is there requirement to open a separate bank account for receipt of money by way of right issue?

Reply: There is no legal requirement of opening a separate bank account for receipt of money.

b. Is valuation report required?

Reply: No, valuation report shall not be required even if the shares are issued at premium as per the provisions of the Companies Act, 2013. But if shares are offered at premium Merchant Banker valuation is mandated under Income tax Act

c. What securities/ shares are covered in right issue?

Reply: According to section 62 of the Companies Act, 2013 read with rule 13 of The Companies (Share Capital and Debentures) Rules, 2014  “shares or other securities” means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date.

d. What if the sole shareholder is deceased, can I apply on his/her behalf?

Reply: If the sole shareholder is deceased, such an application cannot be renounced but legal heir can apply, attaching a copy of the death certificate. Allotment in such cases will be in the deceased name and the applicant then has to approach the Registrar to the company and have this transmitted by following the transmission process.

e. What is renunciation of issue?

Reply: The right to subscription of shares in a company can be assigned to a third party. The transfer of such right is called renunciation of issue

f. Can shares be issued at a premium/discount?

Reply: The Company can issue new share issues at face value or at a premium. There are no regulations for determining the amount of premium for the issue of shares. The company cannot issue shares at a discount except for sweat equity shares.

g. What happen if shares are not fully subscribed?

Reply: Private Company has the authority to dispose unsubscribed shares to any person at the discretion of Board