Rights Issue – Concept, FAQs, Conditions & Procedure

Article Explains Concept of Rights Issue under Section 62(1)(a) of Companies Act, 2013, Conditions for Issuance of Shares/Securities on Rights Issue Basis, Procedure For Issuance Of Right Shares and contains Frequently Asked Questions on Rights Issue.

Concept of Rights Issue under Section 62(1)(a)

1. A company having a share capital proposes to increase its subscribed capital by the issue of further shares, It can do so by issuance of shares or other securities by way of Rights Issue.

2. Rights Issue means offering shares to the existing shareholder in the ratio of their existing shareholding. Thus it is an invitation to the existing shareholders to buy new shares in their existing shareholding.

3. It is also called “Pre-Emptive Right”. Pre-Emptive Right means the existing shareholders have preferential rights to avail the offer than the outsiders.

4. All types of Companies viz. Public, Private, Listed, Unlisted can issue shares through Rights Issue.

5. It is not obligation on the existing shareholders to avail the offer of rights issue, they can decline to accept the offer or they can renounce their right in favor of any other person or they can partially avail the offer or partially renounce their right in favor of any other person.

6. It has not been specified in the Companies Act, 2013 that members approval shall be taken or only approval of Board is sufficient for issuance of shares under rights issue, Therefore shares under rights issue can be issued by passing Board Resolution only or Board may also obtain permission of members in General Meeting.

Conditions for Issuance of Shares/Securities on Rights Issue Basis:

1. Offer for issuance shall be made through Offer Letter to the existing shareholders.

2. Offer Letter shall be issued to only those existing shareholders whose names appear in register of members on the record date.

3. Letter of Offer shall be dispatched through:

• Register Post or
• Speed Post or
• Through electronic mode or
• Courier; or
• Any other mode having proof of delivery

4. Letter of Offer shall specify:

• the number of shares offered;
• Offer Period not being less than 15 days and not exceeding 30 days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined. However, in case of private companies in case 90% of members have given their   consent in writing or in electronic mode, the lesser period than the specified period shall apply.

5. Unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right to renounce the shares offered to him or them in favor of any other person;

6. 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.

Procedure For Issuance Of Right Shares

STEP: 1

Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting.

STEP: 2

Hold Board Meeting  and:

• Pass Board Resolution for Issuance of shares under Rights Issue;
• Pass Board Resolution for approval of Letter of Offer;
• Fix Record Date for identification of shareholders to whom offer shall be given;
• Fix Price of Share, Ratio for Rights Issue;
• Authorize any director or Company Secretary for dispatching of Letter of Offer.

STEP: 3

Fix a record date for identification of shareholders of the company. Offer Letter shall be dispatched only to those shareholders whose names appear in the register of members on record date

STEP: 4

Dispatch Letter of Offer through:

• Register Post or
• Speed Post or
• Courier; or
• Electronic mode viz E-mail or
• Any other mode having proof of delivery.

STEP: 5 Opening of the offer:

• The offer will be open for at least 3 days after issuance of Letter of Offer.
• Offer will be open for Minimum 15 days and Maximum of 30 Days.
• However, in case of private companies in case 90% of members have given their consent in writing or in electronic mode, the lesser period than the specified period shall apply.

STEP: 6 File Form MGT-14 attaching the Board Resolution passed for issuance of shares pursuant to Rights Issue Basis.

STEP: 7 Receive money from the existing shareholders in the Bank account of the company. Such money shall be deposited by shareholder through account payee cheque or through online transfer of funds via NEFT, IMPS, RTGS etc.

STEP: 8 Issue Notice of Second Board Meeting to all the directors of company at least 7  days before the date of Board Meeting.

STEP 9

Hold Board Meeting and:

• Prepare and approve List of Allottees
• Pass Board Resolution for Allotment of Shares

STEP: 10

File Return of Allotment in Form PAS-3 and MGT-14 within 30 days of passing of Board Resolution for allotment of shares.

Attachments of Form PAS-3:

• Certified True Copy of Board Resolution;
• List of Allottees;
• Proof of dispatch of Offer Letter (viz. If offer letter was send via courier then Courier Receipt, if offer letter was sent by Speed Post then Acknowledgement receipt of speed post etc.
• Proof of payment received for shares from the allottes viz. Bank statement of company with credit transaction entries showing amount received and Bank statement of allottees with debit entries showing that they have paid money to the company .

Attachments of Form MGT-14:

• Certified True Copy of Board Resolution;
• List of Allottees

STEP: 11 Deliver the share certificates of allotted shares within a period of 2 months from the date of allotment.

STEP: 12 Intimate the details of allotment of shares to the Depository immediately on allotment of such shares.

STEP: 13 Make necessary entries in the Register of members after issuance of share certificates.

Frequently Asked Questions on Rights Issue

Q.1 Is valuation report required for issuance of shares under rights issue basis?

Answer: No valuations report is required for issuance of shares under Rights issue basis.

Q.2 What is renunciation of right?

Answer: Renunciation of right means an existing shareholder to whom offer was given for availing shares on rights issue basis, he can transfer his right in favor of any other person.

Q.3 If shares are not fully subscribed, What the Board will do?

Answer: Board of Directors may dispose of the share in such manner which is not dis-advantageous to the shareholders and the company.

Q.4 If an existing shareholder to whom offer was given neither accept nor declines to accept the offer then after expiry of offer period, what the board will do?

Answer: The Board of Directors may dispose of the share (For which offer was given to such person) in such manner which is not dis-advantageous to the shareholders and the company;

Q.5 Is there any requirement to open separate bank account for receipt of money by issuing shares under rights issue basis?

Answer: No, there is no such requirement, Company can receive such money in its bank account.

Q.6 Which securities can be issued under Rights Issue basis?

Answer:  Pursuant to 13 of Companies (Share Capital and Debenture), Rules, 2014, Shares or other securities” means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date.

Q.7 Can a company issue share on discount under Rights Issue basis?

Answer: Section 53 of the Companies Act, 2013, prohibits a company to issue shares at discount except in the case of issue of sweat equity shares. Any shares issued by a Company at a discount price shall be void.