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Step by Step Procedure for Rights Issue of Shares
Dashmeet Kaur
| Updated: Oct 19, 2019 | Category: SEBI Advisory

Step by Step Procedure for Rights Issue of Shares

The right issue of shares is an excessively used method of increasing capital at indigent times of listed companies. When a cash-strapped company calls upon its existing shareholders for additional money in return for an issue of shares at a discount, then it is known as the rights issue. The shares offered for subscription under the right issue has a much lower price as compared to the market value of the shares. It is the idea of getting additional capital without depending on any external sources like banks or other financial institutes.

What is Right Issue?

In simple terms, the rights issue is a formal invitation to the existing shareholders to buy additional new shares in the company. The right issue justifies its name because it gives a right to the current shareholders to purchase new shares at discounted rates than market price. By granting the right issue, companies enable the shareholders to increase their market exposure.

Companies that propose to raise the capital by issue of shares offer a proportion of dividends to its existing members in regards to their existing shareholdings. The objective behind it is to ensure an equitable distribution of shares wherein the portion of voting rights does not get affected by the issue of new shares.

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Features of the Right Issue

Following are the fundamental characteristics which define the right issue in a precise manner:

  • A Company initiates the right issue when it has some financial crunch and needs cash without incurring underwriting fees.
  • The right issue of shares facilitates a preferential treatment to the existing shareholders. In the process of which the shareholders get the right to purchase additional shares at a lower price before a specified date.
  • The existing shareholders have the leverage to trade with the other interested participants until the specified date at which the new shares are purchasable. The right issue trade similar to that of equity shares.
  •  The number of additional shares purchased by existing shareholders is always in proportion to their existing shareholdings.
  • Existing shareholders also have a choice to dismiss the right issue of shares. However, if they do not purchase the additional shares, then their existing shareholding will get diluted post issue of additional shares.

A Complete Procedure for Rights Issue of Shares

The provision of Section 62 of Companies Act, 2013, regulates the operations of all the companies from private to public distinctively. The following table describes a step by step procedure to the right issue of shares for both private and public companies:

Steps to Follow For Private Companies For Public Companies
1st Step Calling the Board Meeting at least 7 days before the meeting as per Section 179-(3). Calling the Board Meeting at least 7 days before the meeting as per Section 179-(3).
2nd Step Summon the Board meeting as per SS1 to pass a board resolution for approving the “Letter of Offer” which shall also encompass the right of renunciation. Summon the Board meeting as per SS 1 to pass a board approving “Letter of Offer” which shall also encompass the right of renunciation.
3rd Step Send the “Letter of Offer” to the existing shareholders through speed post or registered post or via an electronic mode. Send the “Letter of Offer” to the existing shareholders by speed post or registered post or through an electronic mode.
4th Step Earlier, Section 62 (2) stated that the Letter of Offer must get posted at least 3 days earlier than the date of opening of the issue. Where the period of subscription shall remain valid for at least 15 days and at most 30days. But the Notification issued on 05.06.2015 introduce new conditions which state that the notice will be sent even lesser than 3 days before the issue opens, when 90% of the members give their consent in writing, and the notification approves the offer to remain open for less than 15 days when 90% members give their consent in writing. Section 62 (2) states that the Letter of Offer must be posted at least 3 days earlier than the date of opening of the issue. The time period of subscription shall remain valid for at least 15 days and at most 30 days
5th Step Not Applicable File MGT-1 in 30 days from the date of passing Board Resolution. Attachment: CTC-of Board Resolution for the issue of “Letter of Offer.”
6th Step Accept Application Money Accept Application Money
7th Step   After receiving application money, summon the second Board Meeting. To do so, send notice of the Board Meeting at least 7 days prior to the date of the meeting. As per section- 173 (3), attest Agenda and notes with the notice. As Per SS1, represent the list of allottee and pass the Board Resolution for allotment of shares.   After receiving application money, summon the second Board Meeting by sending a notice at least 7 days before the meeting. Also, attest Agenda and notes with the notice.  As Per SS1, represent the list of allottee and pass the Board Resolution for allotment of shares.  
8th Step File PAS-3, within 30 days of allotment along with CTC of Board Resolution for allotment of shares and list of the allottee. File PAS-3, within 30 days of allotment along with CTC of Board Resolution for allotment of shares and list of the allottee.
9th Step Issue share certificate within 2   months of allotment and give authority to two directors in addition to one authorized representative to sign and issue share certificate in SH-1.   Issue share certificate within 2 months of allotment and give authority to two directors in addition to one authorized representative to sign and issue share certificate in SH-1.  
10th Step Attain the share stamp from the SDM department within 30 days from the issue date.  Attain the share stamp from the SDM department within 30 days from the issue date. 

Why do Companies Prefer Rights Issue of Shares?

Unlike other means of raising capital, the rights issue of shares is beneficial for both the parties involved wherein; the company gets sufficient funds and gives rights to its existing shareholders to purchase equity shares at minimal prices as per their percentage holding in the company. Right issues provide several advantages over other ways of raising capital; let’s have a glimpse of them:

  • Raising Money with Ease– In contrast to public offerings, the rights issue follows less stringent formalities. Since the companies give offering to the existing shareholders, it becomes an internal matter thus does not involve many regulations. The listed companies have to file a letter of offer with SEBI and stock exchanges for public comments to get approval before they issue new shares.
  • Increase Promoter Shareholding-Another major advantage of the right issue is that it helps promoters to increase their shareholding in the company by subscribing to an ‘unsubscribed portion’ of the issue.
  • Expansion without Debt– The right issue of shares is a favorable mode of raising capital where a company manages to raise needed money from its existing shareholders without making any changes in terms of percentage holdings of any member, so there is no scope for debt.
  • Record Date and Pricing-To determine the numbers of eligible shareholders to participate in the rights issue, companies announce a record date. The companies issue rights at a discount not only to reward their shareholders but also to get maximum subscriptions and raise the required capital.

Before you decide to choose this method of raising the capital, you need to get well versed with the statutory provisions related to it.

Bottom Line : –Investors may get tempted by the prospect of purchasing shares at a discount with a rights issue. However, the prices may not always be moderate. Moreover, to know the cost of the previous shares, you need to know the purpose of the additional funding before accepting or rejecting the right issue. Seek an excellent explanation of why the rights issue and share dilution are an essential part of a company’s strategic plan.

Dashmeet Kaur

Dashmeet Kaur is an experienced content writer, having proficiency in writing Legitimate content with comprehensive research. She also has a keen eye to detail and incorporating accurate facts.

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