As we already know any corporate organization need fund to grow and that fund can either be raised by way of debt or by through share capital when we raise share capital, we increase the authorized share capital, subscribed share capital, and paid-up share capital and there are different methods through which we can raise share capital i.e. through issuing shares to existing shareholders, new shareholders etc., however, when we issue new shares to an existing shareholder it can also be done through the right issue. In this write-up, I am going to analyse the provisions related to the right issue. Let’s first understand these three concepts i.e. Authorized share capital, Subscribed share capital and paid-up share capital.
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What is Authorized Capital of the Company
Section 2(8) of Companies Act, 2013 defines the Authorized share capital:-
“Authorised capital” or “Nominal capital” means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company.
So authorized share capital is the amount by which the company is registered and it is the maximum amount that the company can raise as its share capital.
Section 2(86) of Companies Act, 2013 defines the subscribed share capital:-
“Subscribed capital” means such part of the capital which is for the time being subscribed by the members of a company;
Subscribed capital is that capital in respect of which shares are allotted to the member of the company. However, that may be fully paid-up or may not be fully paid-up.
Section 2 clause (64) define paid-up share as “paid-up share capital” or “share capital paid-up” means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called;
This entire definition of paid-up share capital can be divided into three parts, first part, the aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued:- this is the money received due to allotment of new shares.
The Second part, amount credited as paid-up in respect of shares of the company:- This is the capitalization of the reserve, done after the issue of bonus shares.
The third part, but does not include any other amount received in respect of such shares, by whatever name called:- this is the premium amount on shares.
In conclusion, we can say that authorized capital is the maximum amount that can be raised by the company, subscribed capital is that part which is taken by the members of the company, and paid-up capital is that total amount paid by the members on the shares subscribed by them.
In this write-up, I am going to discuss how the company increase its subscribed and paid-up capital by way of Right issue, ESOPs, and Preferential issue. All these methods of raising subscribed capital are governed by the same section that is Section 62 of the Companies Act, 2013.
Right Issue
The Right issue signifies the preemptive right of the existing shareholders to have first right to subscribe to the shares of the company if the company is increasing its share capital by way other than private placement and preferential issue.
Section 62’s subsection (1) deals with the right issue. As per subsection, if any company be it private or public may come-up with the right issue.
However, only equity shareholders can participate in any right issue. Shares in right issue should be offered in the same proportion as their existing holding of the equity shareholders.
So, if A Ltd having a share capital of 100 shares and Mr B and Mr C both hold 50 shares each, A Ltd decided to come with the right issue of 50 shares then both Mr C and Mr B will be getting 25 shares each.
Shares in right issue are offered through the letter of offer which is issued in the form of notice specifying the number of shares offered to each shareholder. Notice to be sent through registered post, or speed post, or e-mail, or in any other manner with proof of delivery.
The offer will remain open for minimum 15 days and maximum 30 days, existing shareholders can either accept the offer or reject it or renounce it, however, if nothing is communicated during the offer period then it shall be treated as deemed rejection by the existing shareholders.
Once the offer is rejected or deemed to be rejected by the existing shareholders then Board of Director can dispose of such shares in a way, they deem fit, subject to the conditions that it should not be detrimental to existing shareholders.
In case of Private Company, if Ninety Percent of shareholders gives their consent then the notice may be sent in less than three before the opening of issue and issue may remain open for less than Fifteen (15) days.
Procedure for Right Issue
The right issue is one of the easiest ways to increase the subscribed capital since it does not involve issue like valuation of shares, passing of special resolution etc.; however, the only limitation is that it can be offered only to existing equity shares.
1. Notice will be sent to directors for a board meeting at least 7 days before the meeting, shorter notice possible subject to condition specified under section 173.
2. Board Meeting approving right issue and sending the letter of offer to existing equity shareholders.
3. Letter offer to be sent at least 3 days before the opening of the issue.
4. The issue to remain open for at least 15 days and maximum 30 days.
5. After receiving subscription money allotment of shares to be done.
6. Return of allotment to be filed with the registrar within 30 days of allotment under section 39 sub-section 4.
Note: Under the provisions governing the right issue there is no time limit for allotment of shares, however, shares should be allotted within 75 days otherwise same will be treated as a deemed deposit.
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