CA Nitesh More
A. A Pvt Ltd is having two members, Mr A & Mrs A. Co wants to raise Rs 2 Lakhs by issue of equity shares. Mr A & Mrs A do not want to invest further. Even Mrs A wants to sell some shares. However, Mr C wants to invest in the Company. It is very costly & complex for company to follow private placement provisions. Mr C purchases 100 shares from Mrs A. Now , company have 3 members: Mr A, Mrs A & Mr C. Company comes with right issue, the process of which is very simple i.e. by calling a Board meeting , without opening new bank a/c, without valuation of shares, without need to pass SR in general meeting. Mr A & Mrs A renounced right in favour of C & company able to raise fund easily.
B. Relevant provisions are as follows:
Sec 62. (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;
(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be dispatched through registered post or speed post or through electronic mode to all the existing shareholders at least three days before the opening of the issue.
i) Call a Board meeting to approve right issue including “letter of offer”, which shall include right of renunciation also.
ii) Send offer letter to all existing members as on the date of offer
iii) Receive acceptance/renounciation/rejection of rights from members to whom offer has been sent & also from persons in whose favour right renounced.
iv) Call a Board meeting to approve allotment, issue of share certificate & authorize a director to file E-form PAS 3(Return of Allotment) to ROC & MGT 14 for issue of share certificate.
v) File E-form MGT 14 for issue of share (Allotment of shares & Issue of share certificate: Refer D below) & PAS 3(Return of Allotment) to ROC for allotment
vi) Issue share certificate
D. MGT14 is not required to be filed for allotment of shares, however, it is required to be filed for issue of shares:
i) As per sec 179(3)(c), the Board of Directors of a company shall exercise the powers to “issue” securities on behalf of the company by means of resolutions passed at meetings of the Board.
ii) As per sec 117(1) & (3), such resolutions are to be filed to ROC.
iii) It has been decided that allotment of shares & issue of share are different.
iv) To avoid dispute, it is suggested to pass both resolutions i.e.
i) for allotment of shares as well
ii) for issue of share certificate in same meeting & file with ROC in MGT14.
E. Why it is safer to renounce right in favour of member?
As per Letter No. 8/81/56-PR, dated 4 November, 1957, the issue of further shares by a company to its members with the right to renounce them in favour of third parties does not require the issue or registration of a prospectus. However, there is no such circular under Companies Act, 2013.