{"id":6781,"date":"2019-10-19T09:30:28","date_gmt":"2019-10-19T04:00:28","guid":{"rendered":"https:\/\/swaritadvisors.com\/learning\/?p=6781"},"modified":"2020-04-16T15:56:07","modified_gmt":"2020-04-16T10:26:07","slug":"step-by-step-procedure-for-rights-issue-of-shares","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/learning\/step-by-step-procedure-for-rights-issue-of-shares\/","title":{"rendered":"Step by Step Procedure for Rights Issue of Shares"},"content":{"rendered":"\n<p class=\"has-drop-cap\">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 <em><a rel=\"noreferrer noopener\" aria-label=\"right issue (opens in a new tab)\" href=\"https:\/\/swaritadvisors.com\/rights-issue\" target=\"_blank\"><\/a><\/em><strong><a href=\"https:\/\/swaritadvisors.com\/learning\/step-by-step-procedure-for-rights-issue-of-shares\/\"><em>rights issu<\/em>e<\/a><\/strong>. The shares offered for subscription under the right issue has a much lower price as compared to the market value of the shares.\u00a0It is the idea of getting additional capital without depending on any external sources like banks or other financial institutes. <\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a54dd98107d8\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a54dd98107d8\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/swaritadvisors.com\/learning\/step-by-step-procedure-for-rights-issue-of-shares\/#What_is_Right_Issue\" title=\"What is Right Issue?\">What is Right Issue?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/swaritadvisors.com\/learning\/step-by-step-procedure-for-rights-issue-of-shares\/#Features_of_the_Right_Issue\" title=\"Features of the Right Issue\">Features of the Right Issue<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/learning\/step-by-step-procedure-for-rights-issue-of-shares\/#A_Complete_Procedure_for_Rights_Issue_of_Shares\" title=\"A Complete Procedure for Rights Issue of Shares\">A Complete Procedure for Rights Issue of Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/learning\/step-by-step-procedure-for-rights-issue-of-shares\/#Why_do_Companies_Prefer_Rights_Issue_of_Shares\" title=\"Why do Companies Prefer Rights Issue of Shares?\">Why do Companies Prefer Rights Issue of Shares?<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_Right_Issue\"><\/span>What is Right Issue?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In simple terms, the rights issue is a formal invitation to\nthe existing shareholders to buy additional new shares in the company. The\nright issue justifies its name because it gives a right to the current shareholders\nto purchase new shares at discounted rates than market price. By granting the\nright issue, companies enable the shareholders to increase their market\nexposure. <\/p>\n\n\n\n<p>Companies that propose to raise the capital by issue of\nshares offer a proportion of dividends to its existing members in regards to\ntheir existing shareholdings. The objective behind it is to ensure an equitable\ndistribution of shares wherein the portion of voting rights does not get\naffected by the issue of new shares.<\/p>\n\n\n\n<div class=\"browse\">\n<p>Browse through our articles on services provided at <a href=\"https:\/\/swaritadvisors.com\">Swarit Advisors<\/a>, and just let us know if we can help you with your IPO or Comapny Takeover or SEBI Advisory Services.<\/p>\n<div class=\"browse1\">\n<table class=\"table1\">\n\n<tbody>\n<tr>\n<td><a href=\"https:\/\/swaritadvisors.com\/mergers-and-acquisitions\"><span>Mergers and Acquisitions<\/a>&nbsp;<\/span><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/buyback-of-shares\"><span>Buyback of Shares<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/merger-and-amalgamation\"><span>Merger and Amalgamation<\/span><\/a><\/td>\n<\/tr>\n<tr>\n<td><a href=\"https:\/\/swaritadvisors.com\/public-issues\"><span>Public Issues<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/rights-issue\"><span>Rights Issue<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/preferential-allotment\"><span>Preferential Allotment<\/span><\/a><\/td>\n<\/tr>\n<tr>\n<td><a href=\"https:\/\/swaritadvisors.com\/company-takeover\"><span>Company Takeover<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/issue-of-debentures\"><span>Issue of Debentures<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/insurance-broker-license\"><span>Insurance Broker License<\/span><\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/table>\n<\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Features_of_the_Right_Issue\"><\/span>Features of the Right Issue<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Following are the fundamental characteristics which define the\nright issue in a precise manner:<\/p>\n\n\n\n<ul><li>A Company initiates the right issue when it has\nsome financial crunch and needs cash without incurring underwriting fees.<\/li><li>The right issue of shares facilitates a\npreferential treatment to the existing shareholders. In the process of which\nthe shareholders get the right to purchase additional shares at a lower price\nbefore a specified date.<\/li><li>The existing shareholders have the leverage to\ntrade with the other interested participants until the specified date at which\nthe new shares are purchasable. The right issue trade similar to that of equity\nshares.<\/li><li>&nbsp;The\nnumber of additional shares purchased by existing shareholders is always in\nproportion to their existing shareholdings.<\/li><li>Existing shareholders also have a choice to\ndismiss the right issue of shares. However, if they do not purchase the additional\nshares, then their existing shareholding will get diluted post issue of\nadditional shares.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"A_Complete_Procedure_for_Rights_Issue_of_Shares\"><\/span>A Complete Procedure for Rights Issue of Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The provision of <a rel=\"noreferrer noopener\" aria-label=\"Section 62 of Companies Act (opens in a new tab)\" href=\"http:\/\/www.mca.gov.in\/SearchableActs\/Section62.htm\" target=\"_blank\"><strong>Section 62 of Companies Act<\/strong><\/a>, 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:<\/p>\n\n\n\n<table>\n<tbody>\n<tr>\n<td>Steps to Follow<\/td>\n<td>For Private Companies<\/td>\n<td>For Public Companies<\/td>\n<\/tr>\n<tr>\n<td>1<sup>st<\/sup> Step<\/td>\n<td>Calling the Board Meeting at least 7 days before the meeting as per Section 179-(3).<\/td>\n<td>Calling the Board Meeting at least 7 days before the meeting as per Section 179-(3).<\/td>\n<\/tr>\n<tr>\n<td>2<sup>nd <\/sup>Step<\/td>\n<td>Summon the Board meeting as per SS1 to pass a board resolution for approving the \u201cLetter of Offer\u201d which shall also encompass the right of renunciation.<\/td>\n<td>Summon the Board meeting as per SS 1 to pass a board approving \u201cLetter of Offer\u201d which shall also encompass the right of renunciation.<\/td>\n<\/tr>\n<tr>\n<td>3<sup>rd<\/sup> Step<\/td>\n<td>Send the \u201cLetter of Offer\u201d to the existing shareholders through speed post or registered post or via an electronic mode.<\/td>\n<td>Send the \u201cLetter of Offer\u201d to the existing shareholders by speed post or registered post or through an electronic mode.<\/td>\n<\/tr>\n<tr>\n<td>4<sup>th<\/sup> Step<\/td>\n<td>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.<\/td>\n<td>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<\/td>\n<\/tr>\n<tr>\n<td>5<sup>th<\/sup> Step<\/td>\n<td>Not Applicable<\/td>\n<td>File MGT-1 in 30 days from the date of passing Board Resolution. Attachment: CTC-of Board Resolution for the issue of \u201cLetter of Offer.\u201d<\/td>\n<\/tr>\n<tr>\n<td>6<sup>th<\/sup> Step<\/td>\n<td>Accept Application Money<\/td>\n<td>Accept Application Money<\/td>\n<\/tr>\n<tr>\n<td>7<sup>th<\/sup> Step &nbsp;<\/td>\n<td>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. &nbsp;<\/td>\n<td>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. &nbsp;As Per SS1, represent the list of allottee and pass the Board Resolution for allotment of shares. &nbsp;<\/td>\n<\/tr>\n<tr>\n<td>8<sup>th<\/sup> Step<\/td>\n<td>File PAS-3, within 30 days of allotment along with CTC of Board Resolution for allotment of shares and list of the allottee.<\/td>\n<td>File PAS-3, within 30 days of allotment along with CTC of Board Resolution for allotment of shares and list of the allottee.<\/td>\n<\/tr>\n<tr>\n<td>9<sup>th<\/sup> Step<\/td>\n<td>Issue share certificate within 2&nbsp;&nbsp; months of allotment and give authority to two directors in addition to one authorized representative to sign and issue share certificate in SH-1. &nbsp;<\/td>\n<td>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. &nbsp;<\/td>\n<\/tr>\n<tr>\n<td>10<sup>th<\/sup> Step<\/td>\n<td>Attain the share stamp from the SDM department within 30 days from the issue date.&nbsp;<\/td>\n<td>Attain the share stamp from the SDM department within 30 days from the issue date.&nbsp;<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Why_do_Companies_Prefer_Rights_Issue_of_Shares\"><\/span>Why do Companies Prefer Rights Issue of Shares?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>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\u2019s have a glimpse of them: <\/p>\n\n\n\n<ul><li><strong>Raising Money with Ease<\/strong>&#8211; 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. <\/li><li><strong>Increase Promoter Shareholding-<\/strong>Another major advantage of the right issue is that it helps promoters to increase their shareholding in the company by subscribing to an \u2018unsubscribed portion\u2019 of the issue.<\/li><li><strong>Expansion without Debt<\/strong>&#8211; 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. <\/li><li><strong>Record Date and Pricing-<\/strong>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.<\/li><\/ul>\n\n\n\n<p>Before you decide to choose this\nmethod of raising the capital, you need to get well versed with the statutory\nprovisions related to it. <\/p>\n\n\n\n<p><div class=\"shadow4\"><strong>Bottom Line : &#8211;<\/strong>Investors may get tempted by the prospect of purchasing\nshares at a discount with a rights issue. However, the prices may not always be\nmoderate. Moreover, to know the cost of the previous shares, you need to know\nthe purpose of the additional funding before accepting or rejecting the right\nissue. Seek an excellent explanation of why the rights issue and share dilution\nare an essential part of a company&#8217;s strategic plan. <\/div><\/p>\n\n\n\n<div class=\"read\"><p><b>Also, Read:<\/b> <mark><a href=\"https:\/\/swaritadvisors.com\/learning\/sebi-take-a-view-on-rights-issue-examine-promoter-concept\/\" target=\"_blank\" rel=\"noopener noreferrer\">Why Should SEBI Take a View on Rights Issue<\/a><\/mark>.<\/p><\/div>\n\n","protected":false},"excerpt":{"rendered":"<p>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 [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":6784,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[546],"tags":[],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/6781"}],"collection":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/comments?post=6781"}],"version-history":[{"count":16,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/6781\/revisions"}],"predecessor-version":[{"id":10066,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/6781\/revisions\/10066"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media\/6784"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media?parent=6781"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/categories?post=6781"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/tags?post=6781"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}