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BRIEF ABOUT RIGHTS ISSUE

Company issue shares on the rights basis to its existing shareholders in proportion to their holdings or decided ration for consideration to increase the Subscribed or Paid-Up Share Capital of the Company. Shares that are offered for subscription under the rights issue are at the price lower than the existing market price of the shares. The major advantage of the rights issue is that the Company can raise the funds with no additional cost incurred and that's the reason for Companies opting for the option of Rights Issue to meet the needs of funds instead of borrowing from banks or financial institutions. Also, it involves less documentation & formalities as compared to borrowing from banks.

STATUTORY PROVISIONS FOR REGULATING RIGHTS ISSUE

The issue of the shares on the rights basis is regulated by Section 62 of the Companies Act, 2013 and Companies (Prospectus & allotment of securities) Rules, 2014.

ELIGIBILITY

Rights Issue can be offered to the existing shareholders on the date. Individuals who are the shareholders of the company on the cut-off date are eligible to participate in the Rights Issue of the Company.  

OFFER LETTER

Offer letter should be sent to every shareholder of the Company with the complete details of the numbers of shares being offered mentioned on it. The offer shall be made by sending the notice. The period shall be mentioned in such notice within that timeliness; such an offer has to be accepted. If the offer is not accepted within such a period, it is deemed to be rejected. The notice shall be sent to every shareholder at least 3 days before the opening of an offer. In the case of Private Company, a shorter period of fewer than 3 days is allowed provided that such shorter notice shall be consented by at least 90% of the shareholders.

MODES OF SENDING OFFER LETTER

Offer letter can be sent to the shareholders in any of the following ways:

  • By registered post
  • By speed post
  • By any electronic mode
  • By hand delivery
  • By any other mode with proof of delivery

OFFER PERIOD

Offer period shall be open for the following period depending upon the class of companies:

  • FOR PRIVATE COMPANY: Offer shall be remained open for a minimum period of 15 days and a maximum period of 30 days. Though it can be open for less than 15 days provided that the same is consented by at least 90% of the shareholders.
  • FOR PUBLIC COMPANY: Offer shall be remained open for a minimum period of 15 days and a maximum period of 30 days.

RENUNCIATION OF RIGHTS

The rights issue is offered with an option to renunciation the same. The rights offered to the shareholders under the rights issue can be renounced in favor of any third person. Such rights shall be mentioned in the offer letter.

STEPS BY STEP PROCEDURE FOR RIGHTS ISSUE

  1. FOR PRIVATE COMPANY

    • Call the board meeting and send the notice of the board meeting at least 7 days before the date of the meeting.
    • At a board meeting approve the Rights issue along with that pass the necessary resolution to approve the “Letter of Offer” that should encompass the rights to renunciation also.
    • Send the offer letter as approved in Board Meeting to all the existing shareholders through speed post, registered post or any electronic mode.
    • Such notice shall be sent at least 3 days before the opening of the offer; however, it can be sent on even lesser notice with the consent of 90% of shareholders.
    • After the offer letter is sent, those who accept the offer give the application money.
    • Receive the application money and deposit it into a separate bank account.
    • Convene next board meeting after the receipt of all application money
    • Send the notice of next board meeting before 7 days of the date of the meeting
    • Convene the board meeting and approve the list of allottees and pass the resolution for the Allotment of Shares.
    • Within 30 days from the date of allotment, file form PAS-3 along with the attachment of list of allottees and CTC of board resolution passed for the allotment of shares.
    • Issue the share certificates in form SH-1 within two months from the date of allotment.
    • Pay the necessary stamp duty as per the share stamp of the following state.
  2. FOR PUBLIC COMPANY

    • Call the board meeting and send the notice of the board meeting at least 7 days before the date of the meeting.
    • At a board meeting approve the Rights issue along with that pass the necessary resolution to approve the “Letter of Offer” that should encompass the rights to renunciation also.
    • Send the offer letter as approved in Board Meeting to all the existing shareholders through speed post, registered post or any electronic mode.
    • Send the Letter of Offer at least 3 days before the opening of the offer.
    • File MGT-1 within 30 days from the date of passing board resolution with the attachment of CTC of board resolution & Letter of Offer.
    • Receive the application money and deposit it into a separate bank account.
    • Convene next board meeting after the receipt of all application money
    • Send the notice of next board meeting before 7 days of the date of the meeting
    • Convene the board meeting and approve the list of allottees and pass the resolution for the Allotment of Shares.
    • Within 30 days from the date of allotment, file form PAS-3 along with the attachment of list of allottees and CTC of board resolution passed for the allotment of shares.
    • Issue the share certificate in form SH-1 within two months from the date of allotment.
    • Pay the necessary stamp duty as per the share stamp of the following state.

ADVANTAGES OF RIGHTS ISSUE

Following are the various advantages of Rights Issue:

  • Control: Control remains in the hands of existing shareholders.
  • Dilution in the value: An existing shareholder does not suffer due to dilution of their value of shareholding in case fresh shares are issued to them. The decrease in the value of the shares will be compensated as they will get the new shares at a price lower than the market price.
  • Less expensive: the rights issue is less expensive with the least formalities as compared to the public issue.
  • More certainty: when the fresh issue is made to the existing shareholders rather than the public, there are chances of getting shares on a certain basis.

Frequently Asked Questions (FAQs)

The price of the shares offered under the rights issue is generally less than that of prevailing in the market. A discount of around 20% is given on these prices.

Legally rights issues are made first to the existing shareholders before the new issue to the public. Existing shareholders have pre-emptive rights to refuse. However, shareholders can waive off this right by selling the shares to others.

No, the shareholders who are not willing to exercise rights can sale up to their shares in the stock market. Also, they can give up to the existing shareholders of the company or new shareholders.

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