A rights issue is a significant method for companies to increase their share capital while giving existing shareholders the opportunity to subscribe to new shares. As per Section 62 of the Companies Act, 2013, this article outlines the provisions and procedure for a rights issue, including eligibility, offer letters, right of renunciation, penalties, and FAQs.
APPLICABLE SECTION
62 of the Companies Act, 2013
ELIGIBLE: EXISTING SHAREHOLDERS
As per the Section 62 of the Companies Act, 2013, if the Company propose to increase a share capital it should first offer to persons who, at the time of the offer, are shareholders of the Company in proportion to the paid-up share capital having by them.
PROVISIONS:
1. The Company shall issue Offer letter by way of notice to the existing shareholders.
2. The notice shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least three days before the opening of the issue.
3. Offer Letter should contain the no. of shares offered and time limit within which offered should accept.
4. Time limit should not be less than 15 days and not exceeding 30 days from the date of offer.
5. If time limit of the offer is less than 15 days, then the Private Company must take consent from the 90% of the Members either in writing or in electronic mode by way of ordinary resolution.
6. If offer not accepted within the time limit of the offer, the offer shall be deemed to have been declined.
7. Unless the articles of the Company otherwise provide, the offer contains the right of renunciation.
Right of renunciation means the person to whom shares offered has a right to renounce the shares in favor of any other person.
8. Offer letter should contain the statement of the above right.
9. The Board of Directors of the Company may dispose the shares after the expiry of the time limit in the manner which is not dis-advantageous to the shareholders and the company, if the existing shareholders have not accepted the offer and not renounce in favor of any person.
PROCEDURE:
1. The Board shall convene the Board Meeting and take approval from directors for right issue and the offer letter.
2. The Company shall send offer letter to the existing members of the Company.
3. The members shall send either acceptance letter or renunciation letter to the Company within the time period specified in the offer letter.
4. If the offer not accepted or renounced by the members then the Directors may pass the resolution for disposal of the shares as they deem fit, which is not dis-advantageous to the shareholders and the company.
5. The Company shall receive share application money from the shareholders who have accepted the offer.
6. The Board shall convene Board Meeting for Allotment of the Share.
7. The Company shall file PAS- 3 within 30 days of the Board Meeting.
8. The Company shall issue share certificate to the shareholders within 60 days of the allotment.
PENALTY:
If any company and directors fail to adhere with provision of right issue, there is no direct penal provision is given in the governed provision.
However as per section 450 of the Companies Act, 2013 where no specific penalty or punishment is provided in the Act, the company and every officer of the company who is in default as defined under section 2(60) or such other person shall be punishable with fine up to Rs.10,000/- and further fine up to Rs.1,000/- for every day after the first during which contravention continues subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person
FAQs
Is there requirement to open a separate bank account for receipt of money by way of right issue?
No, there is no legal requirement of opening a separate bank account for receipt of money.
Is valuation report required?
No, valuation report shall not be required even if the shares are issued at premium as per the provisions of the Companies Act, 2013.
What securities/ shares are covered in right issue?
According to section 62 of the Companies Act, 2013 read with rule 13 of The Companies (Share Capital and Debentures) 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.
Conclusion: Understanding the provisions and procedures of a rights issue is crucial for companies and shareholders alike. Complying with the regulations laid out in Section 62 of the Companies Act, 2013, ensures a smooth and legally sound rights issue process. Shareholders should be aware of their rights and responsibilities during this capital-raising method to make informed decisions regarding their investment in the company.
******
Disclaimer: – The above article is prepared keeping in mind all the important and basic questions as well as provision of section 62 of the Companies Act, 2013 which comes in mind of a professional or other stakeholder while opting for right issue in company, The author has tried to cover all the important points. Under no circumstance, the author shall not liable for any direct, indirect, special, or incidental damage resulting from, arising out of or in connection with the use of the information.
Author Bio
After the closure of offer period, within how many days we can make allotment?