Section 62(1) of the Companies Act, 2013 mandates that when a company issues fresh equity shares, it must first offer them to existing shareholders in proportion to their shareholding through a rights issue, ensuring voting power is not diluted. Only one pre-emptive offer is required, which shareholders may accept, decline, or renounce in favour of others, unless restricted by the company’s Articles. The law allows flexibility, including waiver or modification of the offer period—especially for private companies with 90% member consent. The prescribed procedure involves board approvals, issuance of a letter of offer, receipt of application money, allotment within statutory timelines, and filing of forms such as MGT-14 and PAS-3. Renunciation enables shares to be allotted to outsiders, while un-subscribed shares may be disposed of by the Board in the company’s best interest. Overall, the framework balances shareholder protection, procedural compliance, and corporate flexibility in capital raising.
PROCEDURE :
As per Section 62(1) of the Companies Act, 2013 if the Company decides to issue fresh shares, these should be offered to existing shareholders in proportion to existing persons who are holders of equity shares.
‘Right Issue’ means offering shares to existing members in proportion to their existing shareholding. The object is, of course, to ensure equitable distribution of Shares and the proportion of voting rights is not affectedbyissueofFreshshares
Only one pre-emptive right is to be given:
It is now well settled that only one pre-emptive offer is to be made which is otherwise (should be ‘either’) to be acceptable or not at all. The existing shareholders are not to be given further pre-emptive rights in respect of those unaccepted shares. Even such first right can be waived or modified.
A private Company was not required to make right offer under the Companies Act, 1956. Even though earlier there was not provision, it was held that the issue must be bona fide and can’t be made with oblique motives.
STEP POCEDURE OF RIGHT ISSUE OF SHARES
STEP:1
- Company will decide the cutoff date.
- Company wills Prepare Draft Offer of Letter.
STEP:2
Call Meeting of Board Director:
Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting. Attach Agenda of Board Meeting along with Notice. Attach Notes of Agenda along with Agenda.
STEP:3
Hold the Board Meeting:
Check the quorum of Board Meeting. Identify the Shareholders to whom you will issue shares. Pass Board Resolution for approval of offer letter. Authorize a director of company to issue Letter of Offer. Letter of offer shall be dispatched through registered post or speed post or through electronic mode to all the existing shareholders.
STEP:4
Offer will be open at least after 3 days of issue of letter of offer. Offer will be open for minimum 15 days or maximum for 30 days.In case of private company- In Sub-clause (i) of clause (a) of Sub-section (1) and Sub-section (2) of section 62 the following proviso shall be inserted
Provided that notwithstanding anything contained in this sub-clause and sub-section (2) of this section, in case ninety percent, of the members of a private company have given their consent in writing or in electronic mode, the periods lesser than those specified in the said sub- clause or sub-section shall apply. – Inserted by Notification dated 5th June, 2015.
STEP:5
File Form with Registrar:
File MGT-14 with Registrar within 30 days of passing of Board Resolution
Attachments: CTC of Board Resolution for issue of letter of offer
STEP:6
Receive the Money from the Shareholders.
STEP:7
Call Board Meeting after receiving of Share application money.
Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting. [Section-173(3)] Attach Agenda of Board Meeting along with Notice. Attach Notes of Agenda along with Agenda.
STEP:8
Hold the Board Meeting:
Check the quorum of Board Meeting. Present List of Allottes before the Meeting. Pass Board Resolution for allotment of shares (within 60 days of receiving of money).
STEP:9
File form with ROC:
File PAS-3 with Registrar of Company. ATTACHMENTS:
ATTACHMENTS: List of Allottes. Board Resolution for allotment of Shares.
STEP:10
Issue Share Certificate: Pass Resolution for issue of Share Certificate in Board Meeting. Authorize to two directors and a authorize person to sign share certificate. Issue Share Certificate in Form- SH-1 (As per Section-56 with in 2 (two) months from the date of allotment of shares.
PROCESS OF RENUNCIATION OF SHARES
- PROCESS OF RENUNCIATION OF SHARES BY THE SHAREHOLDER:
We can call this process as “Issue of share to outsiders under Right issue of Shares”.
- PROCESS ON PART OF SHAREHOLDER:
Company will give offer to existing shareholders under Right Issue of Shares
If a shareholder is not interested in accepting the offer of additional shares, he can renounce the same in favour of any other person, who may not be member of the Company. {This is the way by which Company can issue shares to outsiders under Right issue of shares}.
Giving of such right of renunciation is mandatory: unless the Article of the company provide otherwise. The right must be specified in Letter of offer given to the Shareholder.
Renounce by Shareholder: Normally ‘Right Issue’ is at a price lower than the prevalent market price A shareholder who may be short of funds can renounce his right to specified number of shares, by ‘Selling’ his right to subscriber.
Exercise Both Rights: He can subscribe to part of his rights and renounce the balance. This is permissible
- PROCESS ON PART OF COMPANY:
i. Company will give offer of “Renunciation” to existing shareholders in the Letter of Offer.
ii. If Shareholder wants to renunciation of Shares then shareholder will give a letter of renunciation in favour of renounce to Company.
iii. Company will receive an acceptance letter and share application money from the renounce.
iv. After closing of offer period company will hold a Board Meeting and allot shares to renounce
- PROCESS OF RENUNCIATION OF SHARES BY THE BOARD:
- PROCESS ON PART OF COMPANY:
i. Company will give offer of “Renunciation” to existing shareholders in the Letter of Offer.
ii. If Shareholder don’t subscribe to the ‘right issue’. They may not even renounce their right to a third person.
iii. In such cases, the Board of Directors can dispose of the un-subscribed shares in a manner which they think is most beneficial to the company.
iv. Board of Directors can allot the UN-subscribe portion of shares to any other person
v. Good Practice: Normally practice followed by good companies is to ask the Shareholders to apply for additional shares, over and above the shares allocable to them as a matter of right.
vi. The un-subscribed portion is allotted to the members who have applied for additional shares on an equitable basis and balance amount is refunded.
*Fraction right in case of Right Issue of Shares:
Sometimes, right issue may result in fractional right. The offer of further shares should be offered to holders of equity shares in proportion to the existing paid up capital, as nearly as circumstances admit. Thus, legally, such fractional right can be ignored. However, this becomes unfair, particularity to small shareholder.*
Summary Procedure For Rights Issue
According to Section 62 (1) of the Companies Act 2013, the procedure for issue of shares is as follows:
1. Issue of notice of Board meeting: According to Section 173(3) of the Companies Act 2013, the notice for the board meeting has to be sent minimum 7 days prior to the board meeting and must specify the agenda for the meeting.
2. Convene the First Board Meeting: The Board meeting is held, and the resolution for issuing rights shares is passed. The rights issue does not require the approval of shareholders, and hence the board can proceed towards the issue.
3. Issue Letter of Offer: On the passing of the resolution, the letter of offer is issued to all shareholders, and the same is sent through registered post or speed post. For shareholders to accept the offer a window period of 15 – 30 days is given that is to say the maximum time the shareholders can take to accept the offer is 30 days and the minimum period is 15 days. The offer is considered declined if it is not accepted before the expiry period. The offer must be open at least three days after the issue of the letter of offer.
4. File MGT – 14: After the passing of board resolution, the company must file the MGT -14 within 30 days of passing of the Board Resolution. The form MGT 14 is mandatory for a public limited company. A true certified copy of the Board Resolution needs to be attached to MGT 14.
5. Receive application money: The shareholders must send the accepted application along with application money.
6. Convene the Second Board Meeting: The company must convene the second board meeting, the notice of which must be sent 7 days prior to the board meeting. The required quorum must be present, and the resolution for the allotment of shares must be passed. On passing the resolution for allotment of shares, the allotment of shares must be done within 60 days of receiving the application money for the same.
7. File the forms with ROC: The company must file the Form PAS -3, within 30 days from the allotment of the shares with the Registrar of Companies. The certified true copy of the Board Resolution and the list of the allottees must be attached to the form. Additionally, the MGT – 14 must be filed for both the allotment and issue of shares.
8. Issue of Share Certificates: The share certificates must be issued; if the shares are in Demat form, then the company must inform the depository immediately on allotment of shares. If the shares are held in physical form, then the share certificates must be issued within 2 months from the date of allotment of shares. The share certificate must be signed by at least 2 directors. The share certificates must be issued in Form SH -1.
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Disclaimer: The above points are indicative and not exhaustive. There may be additional requirements relevant to the assignment. The Company and all intermediaries shall endeavour to follow a structured approach in executing the assignment.I do not take any responsibility for the accuracy, completeness, or adequacy of the above information. The matters stated above should be read in conjunction with, and are subject to, the applicable laws, rules, and regulations in force from time to time.
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