Raising funds is an essential part of the growth of the company. A business may need money to expand operations, launch new products, repay debt, or maintain a balance. The companies can borrow from banks, invite outside investors, or raise capital through the rights issue of shares. Under this method, the company gives its existing shareholders the first opportunity to buy additional shares in proportion to what they already hold. The right issue of shares helps the company raise money quickly, but also protects existing investors from dilution of their ownership.
In this blog, we will explore the meaning and requirements of the right issue of shares under the Companies Act, 2013.
What is a Rights Issue?
A rights issue is when a company offers new shares to its existing equity shareholders, in proportion to their current holding, before offering them to anyone else. The right issue preserves the members’ “right of first refusal” so they can maintain their percentage stake in the company and avoid dilution of the funds.
- Shareholders may subscribe, renounce (transfer the right), or ignore the offer.
- Renunciation: Under Section 62(1)(a)(ii) of the Companies Act, 2013, the offer is deemed to include a right of renunciation in favour of any person unless the Articles of Association (AOA) provide otherwise. Many private companies’ AOAs restrict renunciation (e.g., allow renunciation only to existing members), so always check the AOA.
Governing law
Section 62(1)(a) of the Companies Act, 2013, requires that the members of the company provide a response, whether acceptance or rejection, within 15 to 30 days.
SEBI (ICDR) Regulations set additional rules for disclosure, timing, and operations specifically for listed companies. This includes rights entitlements in demat, trading windows for REs, ASBA, and others.
Statutory timelines (Section 62(1)(a)) of the Companies Act, 2013
- Offer period: The notice to members must allow a response period of not less than 15 days and not more than 30 days.
- Mode of dispatch: The offer must be made by notice delivered to all existing equity shareholders by registered post, speed post, or through electronic mode at the address/email registered with the company.
- After expiry: If the offer is not accepted within the prescribed period, the offer lapses. The Board of Directors have the right to dispose of the unsubscribed shares in a manner not disadvantageous to the shareholders and the company under section 62(1)(a)(iii)) of the Companies Act, 2013.
Step-by-Step Procedure for the Right Issue of Shares in a Private Limited Company
Follow the following procedure to issue rights in a private limited company:
Step 1: Check the Following
- Check whether the AOA permits a rights issue and does not restrict renunciation. If changes are needed, amend the AOA first.
- Make sure the share capital of the company is enough to cover the proposed issue. If not, pass an ordinary resolution to increase authorised capital and file Form SH-7 within 30 days, then proceed with the rights issue.
- If your company falls under the current dematerialisation mandate for private companies, make sure that you have an ISIN and tripartite agreements with a depository/RTA before issuing any new shares.
Step 2: Convene the First Board Meeting
Convene a Board meeting (SS-1 compliant) to:
- Approve the rights issue under Section 62(1)(a) of the Companies Act, 2013.
- Fix the record date (cut-off for eligibility), ratio, issue size, price, opening and closing dates, and last date for acceptance.
- Approve the Letter of Offer (with application and renunciation forms), mode of dispatch, and list of eligible shareholders as on the record date.
- Authorise signatories for documents, banking arrangements for application money, and the Board/Company Secretary to complete filings.
Note: For private companies, no shareholder resolution is required for a pure rights issue (unless you need to amend the AOA/MOA or authorised capital as above).
Step 3: Prepare the Letter of Offer Pack
Your offer pack should include, at a minimum:
- Letter of offer: It includes the number of shares offered, ratio, price, opening & closing dates; last date for acceptance; renunciation rights; how to apply and pay; where to send forms; and contact details.
- Application form for accepting full/part entitlement and applying for additional shares, if allowed.
- Renunciation form (if the AOA permits), details, and KYC of renunciation.
- Instructions for mode of payment, bank details, timelines, treatment of fractional entitlements, refund/adjustment policy if oversubscribed.
Step 4: Dispatch the Notice
- Section 62(2) of the Companies Act, 2013 requires you to send the rights offer notice to all existing equity shareholders at their registered addresses. Use registered post, speed post, or electronic mode for this. Make sure to send the notice at least three days before the issue opens.
- Keep proof of dispatch, such as postal receipts or email logs.
Step 5: Keep the Offer Open
- Under Section 62(1)(a)(i) of the Companies Act, 2013, the offer must stay open for at least 15 days and no more than 30 days from the date of the offer.
- If a shareholder does not respond during the offer period, the offer is considered declined. Step 6: Acceptances, renunciations, and additional shares.
Step 6: Acceptances, Renunciations, and Additional Shares
- Receive applications and monies from shareholders for all or part of their entitlements.
- If renunciation is permitted, collect the renunciation forms and KYC of renounces.
- If you allow any additional shares (over and above entitlement), state the policy in the offer; allotment of additional shares can be done pro rata among those who asked for them, after entitlements are satisfied.
- After the last date, shares not subscribed are lapsed.
Step 7: Application Money and Banking Hygiene
Receive application money through the approved modes. Keep a clear audit trail (bank statements, UTRs, cheque details).
Step 8: Second Board Meeting (allotment)
Hold a second Board meeting to:
- Place before the Board the list of subscribers/renouncees and the money received.
- Approve allotment of shares to eligible applicants.
- Approve issue of share certificates (Form SH-1) or credit to demat (corporate action with the depository/RTA).
- Authorise filing of PAS-3 (Return of Allotment) and payment of stamp duty on share certificates as per the applicable State/Union Territory.
Step 9: File PAS-3 (Return of Allotment)
- File the PAS-3 form within 30 days of allotment of shares and attach the following:
- Certified Board Resolution approving allotment.
- List of allottees (name, address, number of shares, consideration).
- Share capital break-up post-issue.
- If any non-cash consideration (rare in rights), relevant contracts.
- Pay ROC fees based on the company’s nominal capital slab.
Step 10: Issue Share Certificates/Credit Demat
Prepare Form SH-1 share certificates, get them signed by two directors (or a director and the Company Secretary, if any), affix the common seal if your AOA requires, and pay stamp duty as per State law within the prescribed time and deliver share certificates within 2 months from the date of allotment.
Step 11: Update Statutory Registers
Update the Register of Members (Section 88 of the Companies Act, 2013) with new allotments.
Conclusion
A rights issue is the simplest and fairest way for a company to raise equity from its current owners without bringing in outside investors. The law gives shareholders clear first rights, with a decision window of 15 to 30 days. For the company, the process is faster and costs less than a public offering. If the Articles of Association, timelines, and FEMA checks are handled properly, a rights issue becomes an easy and compliant way to fund growth while honouring existing ownership.
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