A rights issue is an offer of shares to all the existing shareholders of the Company in proportion to their existing shareholding. The company also sets a time limit for the shareholders to buy the offered shares. Companies pursue Rights Issue as an avenue to raise funds for various reasons.

Section 62 (1) (a) of the Companies Act, 2013, states as follows:

(1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered— 

(a) 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;

PROCEDURE OF RIGHTS ISSUE:

  • Issue notice in writing to every Director at least seven days before convening the Board meeting.
  • Convene a Board Meeting and pass Board Resolution for considering the issue of shares by way of Rights Issue and approving the Letter of Offer, (any format can be followed since no specific format is prescribed). The Letter of Offer shall include right of renunciation also.
  • Dispatch Letter of offer to all existing shareholders through registered post or speed post or through electronic mode at least three days before the opening of the issue.

It should be noted that the offer shall be kept open for minimum 15 days and maximum 30 days. However, in case 90% of members of the Private Company have given their consent in writing or in electronic mode before issuing of Letter of Offer then such company can open the offer before 3 days and can open the offer for a period less than 15 days also but cannot increase the limit beyond 30 days.

  • Receive acceptance, renunciations, rejection of rights from shareholders within the period mentioned under the Letter of Offer.

It should be noted that the shares, can be renounce by the existing shareholders in favor of any person including outsiders.

  • Shareholders shall pay the necessary amount for subscribing to the shares within the period mentioned under the offer letter. Subscription money can also be received in the form of cash as no restriction has been stated in this regard.
  • Issue notice in writing to every Director at lease seven days before convening the Board meeting
  • Convene a Board Meeting for allotment of shares

It should be noted that allotment of shares shall be done within 60 days of the receipt of the subscription amount. If the Company fails to allot the shares within 60 days of the receipt of the subscription amount, then the Company is required to refund the amount within next 15 days.

Also, if the Company fails to refund the amount within 15 days then such amount will be considered as deposit.

  • File e-Form PAS-3 within 30 days of passing the Board Resolution and following documents needs to be attached :-
  • BR for allotment of shares
  • List of shareholders
  • File e-Form MGT-14 within 30 days of passing the Board Resolution.

It should be noted that Private companies are exempt from filing e-Form MGT-14 vide notification dated 5th June 2015.

Note:

In case, the Company is issuing shares to Foreigners by way of Rights Issue, then the Company is required to obtain the Valuation Report from the registered valuer, before issuing the shares, under Foreign Exchange Management Act, 1999.

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Qualification: CS
Company: Sanjana Gupta
Location: Delhi, New Delhi, IN
Member Since: 27 Apr 2020 | Total Posts: 3

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