ISSUE OF SHARES THROUGH RIGHT ISSUE

DEFINITIONOF RIGHT ISSUE

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 affected by issue of Fresh shares.

A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. This type of issue gives existing shareholders securities called rights. With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date.

Section 62 of the Companies Act, 2013, deals with further issue of capital and prescribes the principle of pre-emptive right of shareholders to subscribe to the rights shares. Shares offered to the existing shareholders are called 'right shares'. The issue of the letter of offer accompanied by the application form indicating there in the number of shares offered for subscription is an offer from the company making the

FEATURES of Right Issue:-

  • Companies undertake a rights issue when they need cash for various objectives. The process allows the company to raise money without incurring underwriting fees.
  • A rights issue gives preferential treatment to existing shareholders, where they are given the right (not obligation) to purchase shares at a lower price on or before a specified date.
  • Existing shareholders also enjoy the right to trade with other interested market participants until the date at which the new shares can be purchased. The rights are traded in a similar way as normal equity shares.
  • The number of additional shares that can be purchased by the shareholders is usually in proportion to their existing shareholding.
  • Existing shareholders can also choose to ignore the rights; however, if they do not purchase additional shares, then their existing shareholding will be diluted post issue of additional shares.

Reasons for a Rights Issue:-

  • When a company is planning an expansion of its operations, it may require a huge amount of capital. Instead of opting for debt, they may like to go for equity to avoid fixed payments of interest. To raise equity capital, a rights issue may be a faster way to achieve the objective.
  • A project where debt/loan funding may not be available/suitable or expensive usually makes a company raise capital through a rights issue.
  • Companies looking to improve their debt to equity ratio or looking to buy a new company may opt for funding via the same route.
  • Sometimes troubled companies may issue shares to pay off debt in order to improve their financial health.

Checking points:-

·         That every unlisted public company making any offer for issue of any securities, before making such offer has dematerialized of its securities held by its promoters, directors, key managerial personnel in accordance with provisions of the Depositories Act, 1996 and regulations made thereunder.

·         That any person who subscribes any securities has dematerialized his all existing securities of the company before such subscription.

·         Whether the authorized share capital is sufficient for issue of shares through right issue and if authorized capital is not enough, then first alter the capital clause of the memorandum of association of the company.

·         Whether articles of association authorise for issue of shares through right issue and if not, then first alter the articles of association to include provisions for issue of shares through right issue.

·         That shares are offered to persons, who at the date of the offer, are equity shareholders of the Company, in proportion to the paid-up share capital on those shares.

The provisions and procedures relating to issue of shares through right issue are as follows:

S. No.

Particulars

      1.

Prepare the list of existing shareholders, along with details of shares, and ascertain the number of shares which can be received by them on the right issue basis.

2.       

Prepare draft share application form, draft offer letter for right issue and the letter of renunciation.

3.       

·         Prepare notice of board meeting along with draft resolution(s) to be passed in the board meeting.

·         Send notice of board meeting to all the directors

Ø  at least 7 days before the date of board meeting or

Ø  in such manner as prescribed under section 173(3) of the Companies Act, 2013 and clause 1 of the Secretarial Standard-1.

4.       

Convene board meeting to pass the following resolutions:

·         Approving letter of offer and application form.

·         Approving issuance of Shares through Right Issue to existing shareholders.

·         To fix the record date, the ratio of shares and the price of shares to be issued.

·         Authorisation to Director/Company Secretary to sign the documents.

5.       

Prepare draft minutes of the board meeting and circulate, within a period of fifteen days from the date of conclusion of that meeting, to all directors, by hand/speed post/registered post/courier/e-mail or by any recognised electronic means, for their comment(s).

6.       

File e-FormMGT-14 (in case of public company as private companies are exempted to file board resolution in respect of issue of shares through right issue) with the Registrar of Companies within 30 days of passing of board resolution.

7.       

Send or dispatch letter of offer to all existing shareholders through registered post or speed post or electronic mode or courier or any other mode having proof of delivery at least 3 days before opening of issue. The letter of offer shall specify the number of shares offered and offer shall be open for a minimum period of 15 days to maximum period of 30 days. (The period of 3 days and 15 to 30 days may be shorter if 90 % shareholders have given their consent for shorter notice period in case of private limited company). The exemption to private limited company is subject to that the said private limited company has not committed a default in filing its financial statement and annual return with the jurisdictional Registrar of Companies.

8.       

After receiving acceptance, renunciation or rejection of right from the shareholders, along with share application money, call another board meeting by sending board meeting notice at least 7 days before the date of board meeting.

9.       

Ensure that securities are to be allotted within 60 days from the date of receipt of the application money and if the company fails to allot securities, has to repay the application money to the subscribers within 15 days from the date of completion of 60 days and in case the company fails to repay the application money within the aforesaid period, the company is liable to repay application money along with interest at the rate of 12% p.a. from the expiry of the 60thday.

10.   

Prepare list of shareholders:

·         who have renounced their shares

·         who have not subscribed or denied the offer of right issue.

·         who have subscribed shares in excess of the entitlement under right issue.

11.   

Convene board meeting within 60 days of receipt of application money to pass the following resolution:

·         Allotment of shares to the persons applied for shares.

·         Authorisation for issue share certificates.

·         Authorisation for making entries in Register of Members.

12.   

Prepare draft minutes of the board meeting and circulate, within a period of fifteen days from the date of conclusion of that meeting, to all directors, by hand/speed post/registered post/courier/e-mail or by any recognised electronic means, for their comment(s).

13.   

Prepare list of allotees for filing with the Registrar of Companies.

14.   

File e-Form PAS-3 along with attachments with the Registrar of Companies within 30 days of allotment of shares.

15.   

Make necessary entries in the register of members within seven days after passing of board resolution for allotment of shares.

                                                                                                

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