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Posted on November 13, 2021
Right Issue of Shares
A company that is in need of funds for expansion or meeting such other business-related expenditure, would issue new shares and invite the existing shareholders to buy the same such that there is no addition of new shareholders taking place to the company which will reduce or dilute the voting power of the existing shareholders. And this issue of new shares to the existing shareholders is known as the right issue of shares.
Right issue is one way through which companies raise additional capital. It is an offer by a company to its existing shareholders to buy additional shares of the firm at a discounted price. It provides the shareholders a chance to increase their holdings in the firm. As per the Companies Act, ‘Right Issue’ means offering shares to existing members in proportion to their existing shareholding. This is done with an intention to bring in fresh capital to the company.
It is one of the modes which can be easily adopted by small companies as it will provide them to not dilute the voting power of current shareholders and thereby keep this within themselves by issuing new shares to them. Rights offering or rights issue (RI) can produce advantage to the company by allowing them to raise capital. If a company is struggling financially, this kind of move could assist them to boost their balance sheet by eliminating debt or injecting new cash flow into the business.
It can also be understood as a pre-emptive right that is held by an existing shareholder on the company and its shares compared to an outsider. And it can be issued by the following companies:
– Listed Company
– Unlisted Company
– Public Limited Company.
The right issue of shares shall be done at a price that is lower than the market price or at a discounted price.
Types of Right Issue of Shares
There are basically four types of right issue of shares and they are listed below:
Fully Paid Right Issue of Shares
The applicant which is the existing shareholder here should pay the full amount of the issue at the time of application being made to the right issue is called a fully paid rights issue.
Partly Paid Right Issue of Shares
Under this, the applying shareholder need to make only part payment and the balance shall be made on a subsequent basis which means only as and when the company makes calls for the payment of the same.
Renounceable Right Issue of Shares
This right issue of shares is the ones that can be sold or transferred by the shareholders in the open market to other investors. This will be done when such a shareholder does not want to subscribe or purchase shares under the right issue.
Non-Renounceable Right Issue of Shares
Under this, the shareholder cannot transfer or sell their right issue holding in the open market or to anyone. Here he can only let such right issue of shares lapse if he does not want to purchase the same.
Why is the Right Issue of Shares Made?
- Company may issue right shares for raising funds such that the debts can be paid off and thereby improving their financial health and also the returns being paid to the investors or shareholders. Improving the debt-equity ratio is also another factor here.
- A company planning to buy another company shall also try raising funds through the right issue of shares.
iii. On the occasion of expansion, huge funds shall be required and this will also raise the need to issue the right shares.
- When the company needs fund for funding a new project or purchase of the asset but taking loans or raising funds through such methods become expensive impractical then they shall issue the right shares and raise funds from the existing shareholders.
Procedure for Right Issue of Shares
As per section 62(1) of the Companies Act, the procedure to be followed for the right issue has been given below:
Deciding Cut off Date and Preparing Draft Offer Letter
The company shall firstly decide the cut-off date for the issue of right shares and also draft an offer letter for the same.
Call Meeting of Board of Directors
The notice of the Board Meeting shall be issued to all directors of the company at least before 7 days of the date of the meeting. Along with this, the agenda of the meeting shall also be attached plus the notes of the agenda.
Hold the Meeting
While holding the Board Meeting the quorum shall be checked. Here the shareholders to whom the right issue shall be made should also be identified. The board should also pass the resolution for approving the offer letter. A director shall also be authorized to issue the Letter of Offer, which shall be dispatched through registered post or speed post or electronic mode to all the existing shareholders.
A span of 15-30 days shall be given to the shareholders, to accept or decline the offer. And if they do not respond or accept the same within 30 days then it shall be deemed declined by such shareholder.
Filing of MGT-14
Once the resolution has been passed, the company shall file MGT-14 within 30 days from the date of passing of the resolution. And this filing is mandatory for a public limited company. A true certified copy of the Board Resolution should be attached along with this form.
Receiving of Application Money
Now the shareholders should send the acceptance of the application along with the application money to the company.
Convening of Second Board Meeting
Now a second Board Meeting shall be held, and the notice of this should be sent at least 7 days prior to the date of the meeting. It should have the required quorum present and the resolution for allotment of shares shall also be passed. And such allocation of shares shall be done within 60 days of receipt of the application money from the shareholders.
Filing with ROC
Form PAS-3 should be filed by the company within 30 days from the date of allotment of shares with the Registrar of Companies (ROC). Along with this, the certified true copy of the Board Resolution and the list of the allottees must be attached. Form MGT-14 is in addition to this for allotment and issue of shares.
Issuing Share Certificates
The share certificates should be issued for all the allotment and issues of shares done under the right issue of shares. A resolution shall also be passed in the Board Meeting to approve the issue of share certificates. Also, authorize two directors and an authorized person to sign a share certificate and the certificate shall be issued in Form SH-1 within two months from the date of allotment of shares.
Consequences for Not Complying with relevant Provisions of Companies Act for Right Issue of Shares
There is no penalty specified to be levied if the company or directors fails to comply with the provisions of the right issue. But in such case, any default committed by the company or directors or any associated officers shall be punishable with a fine up to INR 10,000 along with a further fine of INR 1,000 per day until the contravention continues.
So, we can conclude that through the right issue the company is trying to make a win-win situation whereby the company can raise a new fund for its various activities without diluting the voting rights of the existing shareholders, and helping the shareholders also do the same and also increase the scope of their return earning capacity.