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:
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.
It should be noted that the shares, can be renounce by the existing shareholders in favor of any person including outsiders.
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.
It should be noted that Private companies are exempt from filing e-Form MGT-14 vide notification dated 5th June 2015.
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.