Right Issue – New Rule 12A – Analysis

Corporates need funds to grow. Funds can be debt or equity. If we want to raise funds through the equity route, we may issue shares to existing shareholders or new shareholders.

However, when we issue new shares to existing shareholders, we can take the route of the right issue.

In this write-up, I am going to discuss the provisions related to the right issue. Let’s first understand these three concepts of Authorized share capital, Subscribed share capital and paid-up share capital.

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.

The amount by which the company is registered or mentioned in the capital clause of the Memorandum of Association is called authorized share capital. It is the maximum amount that the company can raise as its share capital.

What is Subscribed 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 the capital for which shares are allotted to the members of the company. However, these shares may or may not be fully paid up shares..

What is Paid-Up Share Capital

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;

The definition of paid-up share capital may be divided into three parts

In the first part, the aggregate amount of money credited as paid-up is equivalent to the amount received as paid-up for issued shares:- this is the money received due to the 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 for 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 about the Right issue. Right issue is governed by Section 62 of the Companies Act, 2013 and  new rule 12A of the Companies (Share Capital and Debentures) Rules, 2014 .

Right Issue

The Right issue signifies the preemptive right of the existing shareholders. The current equity shareholders have the first right to subscribe to the shares if the company is increasing its share capital other than through preferential issues.

Section 62 subsection (1)(a) deals with the right issue to be read with Rule 12A of the Companies (Share Capital and Debentures) Rules, 2014 as inserted byCompanies (Share Capital and Debentures) Amendment Rules, 2021. As per the subsection, any company, private or public, can do the right issue.

However, it is pertinent to note that only equity shareholders can participate in the right issue. But the company can issue both, equity shares, or preference shares as the right issue.

Further, shares should be offered in the same proportion to their existing holding.

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 offered 25 shares each.

As per section 62(1)(a)(i), “the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days or such lesser number of days as may be prescribed 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.”

Further, Rule 12(A) of the Companies (Share Capital and Debentures) Rules, 2014 provides that “For the purposes of sub-clause (i) of clause (a) of sub-section (1) of section 62, the time period within which the offer shall be made for acceptance shall be not less than seven days from the date of offer.”

On a combined reading of both section and rule, we can deduce that Letter-of-offer is used to offer shares in the right issue, issued in the form of notice, specifying the number of shares offered to each shareholder.

Notice shall be sent through any of the following methods, registered post, or speed post, or e-mail, or in any other manner with proof of delivery.

The offer will remain open for a minimum of 7 days and a maximum of 30 days. Existing shareholders can accept, reject, or renounce the offer. In case of no communication 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.

Procedure for Right Issue

The Right-Issue is one of the easiest ways to increase the subscribed capital since it does not involve issues 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. Prepare the letter of offer for the right issue.

2. 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.

3. Board Meeting to approve the right issue, letter of offer and sending the letter-of-offer to existing equity shareholders.

4. File MGT-14 within 30 days, in case of Public Company.

5. Letter offer to be sent at least three days before the opening of the issue.

6. The issue is to remain open for at least seven days and a maximum of Thirty days.

7. Equity Shareholders can accept, reject or renounce the offer.

8. Allot shares after receiving subscription money.

9. File the MGT-14 within 30 days of Board Resolution.

10. Under section 39 sub-section 4, return of allotment to be filed with the registrar within 30 days of the allotment.

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.