One of the methods to induct capital in the Company is by way of ‘Right Issue’. ‘Right Issue’ can also be defined as the pre-emptive right that a shareholder has in the Company in preference to an outsider. Elaborating, whenever a Company is in requirement of capital, then it shall offer its shares to its existing shareholders first in proportion to the shares held by them already and if they refuse or renounce the offer, then only the Company can offer it to an outsider. In this article, we shall discuss about the provisions for offer and allotment of shares by way of right issue as governed by Section 62 of the Companies Act, 2013.

1. Benefits of Right Issue of Shares

  1. Easiest and Simplest way to induct capital
  2. Less compliance cost
  3. No valuation report required
  4. No bar on minimum or maximum fund to be required

2. Procedure for Right Issue of Shares

1. Decide on the following:

• Cut-off date to finalise the list of shareholders to whom the shares shall be offered

• Period for which the offer shall be open

• Value at which the shares shall be allotted

• Draft letter of offer

2. Issue notice of board meeting along with the agenda at least before seven days of convening of meeting.
3. Convene the board meeting to pass the resolution
4. Issue letter of offer to shareholders provided:

• The letter shall specify the number of share being offered.

• The offer period shall be opened at least for 15 days and maximum for 30 days.

• It shall contain the right of renunciation.

• Shall be dispatched through registered post or speed post or courier or any electronic mode or any other mode having proof of delivery.

• At least three days gap before dispatching the offer letter and opening of issue shall be there.

5. Opening of issue and acceptance of money
6. Convene board meeting for allotment of shares within 60 days of receipt of money.
7. File PAS-3 within 30 days of allotment with the following attachments:

• Certified true copy of resolution of allotment

• List of allottees (as per the format)

8. Issuance of share certificates to the allottees within 2 months of allotment
9. Payment of stamp duty on issuance of share certificates as per the prevailing relevant state law.

3. Frequently Asked Questions on Right Issue of Shares

i. Is it important to open the offer for minimum fifteen days?

Reply: It is important to open the offer for minimum fifteen days for all Companies except private Companies. As per the notification providing exemption to private Companies dated 05.06.2015, in case ninety per cent of the members of a private Company have given their consent in writing or in electronic mode, then the periods lesser than those specified in the rule i.e. minimum 15 days period shall not apply.

ii. Can we issue shares at premium?

Reply: Yes, shares can be issued at premium. Further, the following are the important highlights of the case Green Infra ltd. (the assessee) w.r.t. issuance of shares at premium:

  • Issue of shares at premium is a commercial decision.
  • It is the prerogative of the board of directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to shares at such premium or not.
  • The genuineness and identity of the depositor shall be established through the banking channels.
  • Any receipt can be taxable under section 56(1) of Income Tax Act,1961 only if it has some character of income.

iii. Is there requirement to open a separate bank account for receipt of money by way of right issue?

Reply: There is no legal requirement of opening a separate bank account for receipt of money.

iv. Is valuation report required?

Reply: No, valuation report shall not be required even if the shares are issued at premium as per the provisions of the Companies Act, 2013.

v. Can a shareholder accept part and renounce the other part of the offer?

Reply: Yes, this is permissible.

4. Process of Renunciation of Offer

There is no procedure for renunciation of offer under right issue as mandated by the provisions of the Companies Act, 2013. However, the same can be as per the terms laid down in the offer letter and further, following shall be the process on the basis of ordinary prudence:

  1. The shareholder to whom the offer has been received shall write a letter to the Company specifying his intention to renounce the offer.
  2. The person in favor of whom the offer is renounced shall deliver his acceptance letter along with the share application money.
  3. The Company shall take note of the renunciation in the board meeting and allot the shares.

{The author is a Company Secretary in Practice and can be reached at (M) 9999952595 and (E) [email protected]}

Author Bio

Qualification: CS
Company: Kajal Goyal and Associates
Location: Delhi, Delhi, India
Member Since: 11 Jun 2018 | Total Posts: 81
KAJAL GOYAL AND ASSOCIATES, is a Company Secretary proprietorship firm, offering its expertise and one stop solutions for all Corporate compliance requirements to the clients with a strong emphasis on ethics and ‘being on toes’. Capable delivering services related to Companies Act, FEMA, Re View Full Profile

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  1. DIXIT SONI says:

    I bought 200 RIL RE shares on 29 June,2020 which was last date to trade in it.
    After that I did not applied for Rights issue for Reliance PP shares with cut off date 3 June 2020.
    So my shares has been extinguished and also the money which I invested in RIL didn’t get refunded.
    Broker and RTA both are saying we cant do anything if u didn’t applied for rights issue.
    What will be the process to get refund?

  2. Neha Garg says:

    Is anyone of you having idea about any supreme court ruling, where Honerable Supreme courts passed any orders that in case of right issue there is no need to take valuation report.

    If yes please share the link or source where we may get the copy of that supreme court order.

  3. Mayank says:

    Can the shareholder (which is company here) can set off against the amount paid as trade advance to the issuing company. ? Or in case of rights issue, fresh investment is required through banking channels only.
    Kindly suggest.

  4. devendra says:

    in case of pvt ltd company under rights issue can shares be renounced by existing share holder to foreign entity…..any restrictions from companies act/fema…….

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June 2021