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Overview of Right Issue

A company issues right shares to its existing shareholders in proportion to their shareholdings in order to raise subscribed capital. The company offers these shares at a price lower than the prevailing market price of its shares. By this method, a company can raise funds without incurring any additional cost. Moreover, right issue is a more feasible option than borrowing money from banks or financial institutions as it involves fewer documentation and compliance requirements.

Section 62 of the Companies Act, 2013 regulates the process of right issue and also provides pre-emptive right to the shareholders to subscribe to such shares. Therefore, the right issue acts as a formal invitation from the company to its existing shareholders to buy additional shares.

Key Features of Right Issue

The key features of the Right Issue in India are as follows:

  • A company issues right shares to increase its subscribed or paid-up capital;
  • When a company faces any financial shortage, it usually decides to issue the right shares without incurring underwriting charges;
  • A right issue gives preferential treatment to existing shareholders;
  • A company offers shares to its shareholders in proportion to their shareholdings;
  • All the existing shareholders enjoy the right to trade with other market participants;
  • The existing shareholders can also decline the offer of the right issue. However, if they do not subscribe to the additional shares offered, their shareholding gets reduced after the closure of the offer.

Conditions relating to Right Issue

A company needs to fulfil the following conditions before undergoing the process of Right Issue:

  • Every unlisted company making the offer of the right issue needs to get its securities converted into a dematerialised form. The KMP (Key Managerial Personnel), Directors and Promoters hold these securities as per the provisions of the Depositories Act, 1996;
  • Any shareholder who intends to subscribe the shares offered also needs to get their securities converted into dematerialised form;
  • A company needs to check whether its authorised capital is enough to issue the right shares. If not, then the company needs to alter the capital clause of its MOA (Memorandum of Association);
  • A company needs to verify whether the AOA (Article of Association) authorises the issue of the right shares or not. If not, then the company also needs to alter AOA by including the provision of the right issue;
  • A company can issue the right shares only to the shareholders of the company.

Benefits of Right Issue

There are several advantages to the process of right issue in India, which can be summarised as follows:

  • Expansion of Operations: A company chooses the option of a right issue when it is planning to raise its capital and expand its operations, but also wants to avoid fixed payments of interest.
  • Non-availability of Funds: At times, a company needs to raise funds through a right issue when a debt/ loan funding is not available/ suitable or expensive to borrow.
  • Improves Debt-Equity Ratio: When a company aims to improve its debt-equity ratio or looking forward to acquire a new company, it may choose the route of the right issue to raise funds.
  • Improves Financial Health: When a company wants to pay off its debts to improve its financial health, it can choose the option of the right issue.

Who can apply for Right Issue?

As per section 62 of the Companies Act, 2013 the following entities can apply for the Right Issue:

  • Existing Shareholders: A company can issue right shares to its existing shareholders in proportion to their shareholdings by sending them a letter of offer. However, a company needs to fulfil the following conditions for issuing rights shares:
  1. A company needs to send a letter of offer to the shareholders specifying the number of shares offered. The shareholders must accept the offer in a minimum of 15 days and a maximum of 30 days;
  2. If the shareholders do not accept the offer within the prescribed period, the same offer stands declined;
  3. The letter of offer also includes a right to renounce the shares offered in favour of some other person;
  4. After the expiry of the prescribed period or on receipt of an intimation from the shareholder regarding their rejection to the shares offered, the BOD (Board of Directors) may dispose of the shares in a manner advantageous to both the company and shareholders.
  • Employees: A company can issue the right shares to its employee under a scheme of ESOP (Employee Stock Option Plan) by passing a special resolution and complying with specified conditions.
  • Any other person: A company can also issue the right shares to any other person by passing a Special Resolution either for cash or for consideration other than cash. However, the registered valuer determines the price of such shares by making a valuation report subject to prescribed conditions.

Difference between Right Shares and Bonus Shares

Points of Difference

Bonus Shares

Right Shares

Meaning

When a company issues shares to its existing shareholders on a pro-rata basis and out of Free Reserves, it is known as Bonus Shares.

When a company issues right shares to its existing shareholders in proportion to their shareholdings, it is known as Right shares.

Issue Price

A company offer these shares free of cost.

A company offers these shares at a price lower than the prevailing market price of the shares.

Cash Flow

The bonus issue results in no cash flow as shares are given free of cost.

The right issue results in cash inflow as the shares are given at a discounted price.

Consideration

A company does not receive any consideration as shares are issued free of cost.

A company receive consideration as shares are issued against cash.

Authorization

Bonus issue requires approval from the board in the general meeting.

In case of right issue, the directors can obtain approval from the members by passing an ordinary or special resolution.

Market Value

Bonus issue does not affect the market value of the company.

The right issue affects the market value of the company.

Governing Section

Section 63 of the Companies Act, 2013 regulates the process of bonus issue.

Section 62 of the Companies Act, 2013 governs the process of right issue.

 

Process for Issuing Right Shares

The steps involved in the process for Issuing Right Shares in India are as follows:

  • Prepare a list of Existing Shareholders: The directors need to prepare a list of existing shareholders together with the details of shares held by them. This is required to ascertain the number of right shares received by shareholders.
  • Draft necessary Documents: The directors need to prepare and draft the following documents:
  1. Share Application Form;
  2. Offer Letter for the right issue; and
  3. Letter of Renunciation.
  • Notice for Board Meeting: A notice of the Board Meeting (BM) must be sent at least seven days before the date of BM. The notice must be in a manner specified under section 173 (3) and clause 1 of the Secretarial Standard -1.
  • Call a Board Meeting: In a Board Meeting, the directors need to discuss and pass resolutions on the following:
  1. Approval of Letter of Offer;
  2. Approval of Share Application Form;
  3. Approval of Right Issue;
  4. To fix a record date for the right issue;
  5. To decide the proportion for right issue;
  6. To fix the issue price of the right shares.
  7. To authorise Director/ Company Secretary to sign the documents.
  • Prepare Minutes of Meeting: The Company Secretary prepares minutes of the BM (Board Meeting) and circulates the same to the directors within fifteen days, starting from the date of conclusion of that meeting. The company can send minutes by either of the following methods:
  1. Hand Delivery;
  2. Speed Post;
  3. Registered Post;
  4. Courier;
  5. E-mail; or
  6. Any other recognised electronic means.
  • File MGT-14: After passing the board resolution, the directors are required to file form MGT-14 with the ROC (Registrar of Companies) within thirty days. However, a public company is exempted from filing a board resolution concerning the right issue.
  • Dispatch Letter of Offer: The directors need to send a letter of offer to all the existing shareholders through a registered post/ speed post/ courier/ E-mail/ hand delivery, etc., at least three days before the opening of the issue. Further, the letter of offer must enumerate the number of shares offered and be kept open for a minimum of fifteen days and a maximum of thirty days. However, in case of private companies, a period less than three days and fifteen to thirty days is also valid if 90% of the shareholders have given their consent for the same.
  • Hold a Board Meeting: The directors of the company need to hold a board meeting after receiving the following from the holders:
  1. Acceptance, Renunciation or Rejection of Right;
  2. Share Application Money.

The company needs to send the notice for the meeting at least seven days before the date of the meeting.

  • Allotment of Shares within 60 days: The company needs to allot its shares within sixty days from the date of receipt of share application money. If the company fails to allot the shares, it needs to refund all the amount received within fifteen days from the date of completion of sixty days. However, if the company fails to refund the share application money, it will be liable to pay interest at a rate of 12% p.a., starting from the expiry of the 60th
  • Prepare a list of Shareholder: The directors need to prepare a list of shareholders containing the following details:
  1. Name of the shareholders who have renounced their shares;
  2. Name of the shareholders who have denied the offer of the right issue;
  3. Name of the shareholders who have subscribed shares more than the entitlement under the right issue.
  • Call a Board Meeting: The directors of the company need to hold a board meeting within sixty days from the receipt of application money to discuss and pass resolutions on the following issues:
  1. Allotment of shares to the applicants applied for shares;
  2. Approval for issuing share certificates;
  3. Approval for making entries in the Register of Members.
  • Prepare Minutes of Meeting: The Company Secretary prepares the minutes of the BM (Board Meeting) and circulates the same to the directors within fifteen days from the date of conclusion of that meeting. The company can send minutes by either of the following methods:
  1. Hand Delivery;
  2. Speed Post;
  3. Registered Post;
  4. Courier;
  5. E-mail; or
  6. Any other recognised electronic means.
  • Prepare a list of Allottees: The directors need to prepare a list of allottees for filing it with the ROC (Registrar of Companies).
  • File Form PAS-3: The directors of the company need to file the Return of Allotment in Form PAS 3 along with all attachments to the Registrar of Companies within thirty days of allotment of shares.
  • Make Necessary Changes in the Register: Lastly, the company needs to make mandatory entries in the Register of Members within seven days of passing of the board resolution for the allotment of shares.

Package Inclusions

  • Free Consultation over the phone;
  • Drafting of Letter of Offer;
  • Approval for the Right Issue;
  • Filing of Form PAS-3 with the Registrar of Companies;
  • Discussion on issue of Shares Certificates.

FAQs for Right Issue

The Right issue is basically an invitation to the already existing shareholders to buy additional new shares in the company, that too, at the discounted rates than the market price. Section 62 of the Companies Act, 2013, is the binding and governing section for the concept of Right Shares, and it is applicable to all the public limited companies, private limited companies, and unlisted companies.

The process of applying for the rights issue is by way of Applications Supported by Blocked Amount (ASBA). If the applicant’s bank supports it, then one can apply online just like an Initial Public Offer (IPO).

In the theoretical aspect, value (of a right) is basically the value of a subscription right. Throughout the period of time when the offering regarding the new rights is being announced up until three days prior to the expiry of subscription rights (called as the cum rights period), the value of the right is definite in nature and can easily be calculated.

A Rights Issue is one way-out for a cash-strapped company to raise capital often to pay down debt. Shareholders can buy new shares that, too, at a discounted rate for a certain period. Further, with the right issue, the stock price is diluted and goes down as more shares are issued in the market.

The Split Application Form is needed whenever shareholders want to renounce only a portion of their holdings and also want to apply for the rest of their holdings. The said form is also required whenever the shareholders want to renounce their holdings in favour of two or more than two persons.

The Right issue is basically an invitation to the already existing shareholders to buy additional new shares in the company, that too, at the discounted rates than the market price.

The value of the right is calculated with reference to the market value of the shares, and the following steps may be taken

  1. The market value of the shares held by a shareholder has to be ascertained.
  2. The price of the new share, which is required to be paid to the company, has to be added with the market value of the shares held to ascertain the total price of all the shares.
  3. The average price of one share has to be ascertained by dividing the total price of all the shares by the number of shares.
  4. The value of the right will be the difference between the market value and the average price of the share.
  5. Formula for calculating Value of Right - Value of Right = Market Value – Average Price
  6. An Alternative Formula is - Right shares/ total shares after right issue X (Cum right price – New Issue Price)

As per section 62 of the Companies Act, 2013, if at any time, a company having a share capital wants to raise its subscribed capital by the issue of further shares. Such shares shall be provided to either of the following listed –

  1. Existing Shareholders
  2. Employees
  3. Other Persons

As per a notification issued by the SEBI (Security Exchange Board of India) in Public Issues, the concerned issuer shall admit bids using only ASBA (Applications Supported by Blocked Amount) facility in the manner prescribed by the Board. However, in the case of the Right Issue, where not more than one payment option is given, the concerned issuer would give the facility of ASBA.

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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