As per section 62(1)(a) of Companies Act, 2013, A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. Rights issue is a way by which a listed company can raise additional capital. This type of issue gives existing shareholders the right to subscribe to newly issued shares in proportion to their existing holding instead of going to general public.
This is a major advantage and an important reason why many companies are moving more and more towards Rights Issue for catering to its additional financial requirement as opposed to borrowings from banks and other financial institutions which involve a lot of formalities/ documentations and also additional interest cost. Since a rights issue results in higher equity base for the organization, it also provides it with better leveraging opportunities. Companies with healthy balance sheets might also raise money through a rights issue to acquire a competitor or open new facilities. For a shareholder, this can create capital gains.
Section 62(1) provided that whenever at any time, a company having a share capital propose to increase its subscribed capital by issue of further shares, such shares shall be offered:
- To person who, at the date of offer, are holder of equity shares of the company – by sending letter of offer subject to the following conditions :-
- The offer shall be made by notice specifying the number of shares offered and limiting a time not being less than 15 days and not exceeding 30 days from the day of offer with which the offer, if not accepted, will be deemed to have been declined;
Provided that notwithstanding anything contained in this sub-clause shall apply – in case 90% of the members of a private company have given their consent, in writing or in electronic mode, within period lesser than those specified in the said sub-clause.
- After the expiry of time specified in the abovementioned notice, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accepted the shares offered, the BODs may dispose of them in such manner which is not disadvantageous to the shareholders and the company.
Procedure for Right Issue of Shares:-
- Step 1 :-
Check whether the right issue is within the authorized share capital of the company. If not, steps should be taken to increase the authorized share capital of the company.
No company shall make any further issue of capital during the period commencing from the submission of offer document to the SEBI on behalf of the company for rights issues, till the securities referred to in the said offer document have been listed or application money refunded.
- Step 2 :-
In case of listed company, notify the stock exchange concerned the date of Board Meeting at which the right issue is proposed to be considered at least 2 days in advance of the meeting.
A company cannot make right issue unless:
- The issuer enter into an agreement with depository for dematerialization of securities already issued or proposed to be issued to the existing shareholders; and
- The issuer gives an option to the shareholder/shareholders to receive the certificate or hold securities in dematerialized form with a depository.
- Step 3 :-
Issue notice of Board Meeting to the directors of the company as per section 173 of the Companies Act, 2013.
- Step 4 :-
Hold Board Meeting and decide the following matters:
- Pass Board Resolution for proposal for right issue;
- Decide the quantum of right issue and the proportion of right shares and premium, if any, thereon in consultation with the lead merchant banker;
- Fixation of record date;
- Approval of draft letter of offer;
- Authorization of Managing Director or Company Secretary to finalize the letter of offer in consultation with the Merchant banker;
- To approve a draft application forms;
- To authorize Company Secretary or other officer to send the letter of offer to the member and to do such acts, deeds and things as may be necessary.
- Step 5 :-
Immediately after the Board Meeting, notify the Stock Exchange about the particulars of Board’s decision within 15 minutes of the closure of board meeting.
- Step 6 :-
Forward 6 sets of letter of offer and composite application forms to the stock exchange prior to its dispatch to the shareholders.
- Step 7 :-
Open an account with the designated bankers to the issue for acceptance of applications in accordance with the SEBI regulations.
- Step 8 :-
Deposit with Regional Stock Exchange an amount equal to 1 % of the total issue amount as per clause 42 of Listing Agreement.
- Step 9 :-
After the last date for making the application, collect the application forms received and scrutinize them in all respect.
- Step 10 :-
Convene a Board Meeting and pass a resolution for allotment and file Return of Allotment with ROC in e-form PAS-3. Attach with the list of allottees and a certified copy of the resolution.
- Step 11 :-
Prepare and dispatch the Share Certificates to the allottees. Share Certificate should be dispatched within 2 months from the date of allotment.
- Step 12 :-
Immediately after the allotment, enter the particulars in the Register of Members.
- Step 13 :-
Make application to the stock exchange for listing of right shares allotted.