1. Introduction
In case a company is looking for an effective way to raise capital without diluting control or seeking external investors, Right Issues are the answer.
This process grants existing shareholders the exclusive right to purchase newly issued shares in proportion to their current holdings. It’s a strategic move often adopted by Companies to foster loyalty amongst the shareholders, while maintaining its ownership structure, thereby fueling your Company’s growth.
Struggling to wade through the complex procedures? This comprehensive article cuts to the chase, outlining each step efficiently. Streamline your rights issue, maximize engagement from your trusted investors, and fuel your company’s growth – it’s that simple.
Page Contents
2. Decoding the Meaning of Right Issue
A Right Issue refers to a specific method for Private Limited Companies and Public Limited Companies to raise capital by offering new shares to their existing shareholders proportionally to their current holdings.
Governing Provisions of Companies Act 2013: Section 62(1)(a) and Rule 12A of The Companies (Share Capital and Debentures) Rules, 2014.
Definition: Issue of shares to those who, at the date of the offer, are holders of equity shares of the company in proportion to the paid-up share capital on those shares by sending a letter of offer
3. Conditions for Right Issue
Shares under Right Issue shall be offered to the existing equity shareholders of the company by sending a letter of offer subject to the following conditions, namely: –
i. The offer shall be made by a notice specifying the number of shares offered; and
ii. limiting a time not being less than fifteen days or such lesser number of days as may be prescribed and not more than 30 days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;
iii. The offer shall be deemed to include right of renunciation, unless the articles of the company otherwise provide; and the notice referred above shall contain a statement of this right.
iv. If the offer is rejected by the equity shareholders after the expiry of the time specified in the notice aforesaid; or
v. 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.
The said notice shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least 3 (three) days before the opening of the issue.
i. Check authorized share capital of the company
In case of insufficient authorized share capital, the company is required to increase its authorized share capital up to the appropriate number for the proposed right issue.
ii. Conduct a Board Meeting
The company is required to conduct board meeting to obtain approval from the directors of the company for the purpose of right issue of shares of the company.
Note: While calling Board Meeting of the Company, provisions of the Companies Act, 2013 and Secretarial Standard on Meeting of Board of Directors (SS-1) shall be followed.
iii. Dispatch the Letter of Offer
The Letter of Offer shall be dispatched to all the existing equity shareholders of the company at least 3 (three) days before opening of the issue, through registered post or speed post or electronic means or courier or any other mode having proof of delivery.
Offer will be opened for a period of minimum 15 days and maximum 30 days. However, in case of Private Limited Companies, in case 90 (ninety) percent, of the members have given their consent in writing or in electronic mode, the period minimum period can be lesser than 15 days as well.
iv. Acceptance of offer
The shareholders are required to accept the offer within the offer period as mentioned in the Letter of Offer. In case where the offer is not accepted before the expiry period, it is considered declined.
Note: The offer shall open at least 3 days after the issue of Letter of Offer
v. Filing of MGT-14 with the Registrar of Companies
The company shall file Form MGT-14 with the Registrar of Companies within a period of 30 days of passing the board resolution for Right Issue.
However, in case of Private Limited Companies, filing of MGT-14 is not required to be filed.
vi. Receipt of Application money
The shareholders who have accepted the offer are required to send application money to the company against the shares accepted by them.
vii. Conduct a Board Meeting for allotment of shares
The company is required to conduct board meeting to pass a resolution for allotment of shares to the shareholders who have accepted the offer and has paid the application money to the company.
The allotment of shares shall be done within a period of 60 days from the date of receipt of application money from the shareholders. Otherwise, the money so received shall be treated as a deposit.
Note: While calling Board Meeting of the Company, provisions of the Companies Act, 2013 and Secretarial Standard on Meeting of Board of Directors (SS-1) shall be followed.
viii. Filing of PAS-3 with the Registrar of Companies
The company shall file Form PAS-3 with the Registrar of Companies within a period of 30 days from the date of allotment of shares.
ix. Issue of Share Certificate
The company is required to issue share certificate in Form SH-1 to the shareholders within a period of 2 (two) months from the date of allotment of shares.
x. Maintenance of register of members
The particulars of every share certificate issued shall be entered in the Register of Members of the company maintained along with the name of person to whom the shares has been issued, indicating the date of issue.
In case shares are issued to any non-resident. The company is required to file Form FC-GPR with the Reserve Bank of India within a period of 30 days from the date of allotment of shares.
The following documents are required to be submitted along with the Form FC-GPR:
i. Declaration to be filed by the authorised representative of the Indian company.
ii. CS certificate.
iii. Valuation certificate. However, for Right Issue, valuation certificate is not required. A declaration (plain paper) may be attached that the rights issue to person’s resident outside India is not at a price less than the price offered to persons resident in India. The valuation certificate should not be more than 90 days old as on the date of allotment of shares.
iv. PAS–3/ Board resolution.
v. Memorandum of Association: if applicable, relevant extracts to be attached as “other attachment”.
vi. Merger/ Demerger/ Amalgamation: If applicable, relevant extracts to be attached at the specified attachment “relevant approvals from the competent authority”.
vii. For Rights/ Bonus issue: Acknowledgement letter of FC-GPR/FC-TRS, as applicable, of the original investment.
viii. FIRC/ Debit Statement and KYC: at the specified attachments.
ix. Government approvals, if any.
6. FAQS on Right Issue:
i. Is there any limit of persons to whom offer under Right Issue can be made?
Ans. As per the governing provisions of the Companies Act, 2013, there is no limit but offer under Right Issue shall be made to all the existing equity shareholders of the company.
ii. What all approvals are required to issue shares under Right Issue?
Ans. Only Board approval through Board resolution is required to issue shares under Right Issue.
iii. What is the period of offer?
Ans. The Offer shall be opened for a period of minimum 15 days and maximum 30 days. However, in case of Private Limited Companies, in case 90 (ninety) percent, of the members have given their consent in writing or in electronic mode, the period minimum period can be lesser than 15 days as well.
iv. What is the timeline to dispatch Letter of Offer?
Ans. The Letter of Offer shall be dispatched to all the existing equity shareholders of the company at least 3 (three) days before opening of the issue, through registered post or speed post or electronic mode or courier or any other mode having proof of delivery.
v. What is the timeline to File Form PAS-3?
Ans. As per to Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, the company shall file Form PAS-3 with the Registrar of Companies within a period of 30 days from the date of allotment of shares.
vi. Within how many days of receipt of application money shares should be allotted?
Ans. Shares should be allotted within a period of 60 days from the date of receipt of application money and in case the shares for which application money was received is not allotted within a period of 60 days from the date of receipt of application money and such application money is not refunded within a period of 15 days from the completion of 60 days, such amount shall be treated as a deposit under Rule 2(1)(c)(vii) of the Companies (Acceptance of Deposit) Rules, 2014.
vii. Is there any requirement to open a separate bank account?
Ans. There is not requirement to open a separate bank account to receive application money for the shares issued under Right Issue.
viii. Can a company utilize the application money for the shares issued under Right issue before filing of return of allotment in Form PAS-3?
Ans. There is no restriction on utilizing the application money before filing the return of allotment in Form PAS-3. Therefore, Companies can use the funds the moment they receive it and the allotment of shares can be done even after utilizing the funds if the shares are issued under Rights Issue.
ix. Is there any requirement to obtain valuation report for Right Issue?
Ans. Section 62 of the Companies Act, 2013 is silent on the valuation of shares to be issued under Right Issue. Therefore, it is to be concluded that the valuation of shares issued under Right Issue is not mandatory.
Further, as per FEMA in case of shares being issued to a non-resident shareholder under Right Issue, valuation report is not mandatory for the reporting purpose. Merely a declaration on a plain paper that the Right Issue to non-resident is not at per price less than price offered to a person resident in India is required.
7. Conclusion
It can safely be said that Right Issuances pave a viable path for Indian Companies to raise funds, keeping in mind the interests of the shareholders and ensuring regulatory compliance. By way of thorough planning and seamless execution, Right Issues are indeed an underrated fund-raising avenue that many Companies are yet to explore.
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I hope this article has provided you with the valuable insights into the significance of Right Issue. In case you have any queries, or seeking professional assistance in setting up a company and procedural compliances, feel free to contact me at email [email protected] or Phone +91 8506028288.
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