• CS NISHA SARAYAN

Right Issue of Shares

What is Right Issue?


Right issue of shares is an invitation to existing shareholders to purchase new shares of the company where existing shareholders receives the right to purchase additional shares at a specific price within a specific period, in proportion to their existing holdings.


However, shareholders are not obligated to exercise the right offered, it gives a company's stockholders the right, but not the obligation, to purchase additional shares in the company.


In a right issue, the subscription price at which each share may be purchased is generally discounted relative to the current market price. Rights are also often transferable so right holder can transfer it to any other person.


Why right issue is preferred?

Through right issue company offers the existing shareholder the right to purchase shares at a discounted price. It provides easy way of raising funds for the company for expansion of their capital with fewer documentations and formalities.



Key Features:

  • A rights issue is an offer to existing shareholders of company to purchase additional new shares in the company.

  • Shareholders are not obligated to exercise this right.

  • Rights are also often transferable so right holder can transfer it to any other person.



How it works?

As per section 62 of The Companies Act 2013, company can offer right issue of shares to the following:

1. Existing shareholders: Right issue offer are made to the existing shareholder in proportion to the shareholding in the company.

The existing shareholder to whom the offer is made has the right to accept the offer or to renounce the shares offered to any other person where the letter of offer shall contain a statement of this right.

After the expiry of the offer period or receipt of earlier intimation from shareholder on rejection of the offer made, the board may dispose of the application in such a manner that it is not dis-advantageous to the shareholders.

2. Employees: The offer is made to the employees of the company under Employees Stock Option Scheme(ESOP) by passing special resolution.

3. Any other person: Company can also make the right issue offer to any other person by passing special resolution either for cash or consideration other than cash.


PROCEDURE FOR RIGHT ISSUE:-

STEP 1:

AUTHORISATION OF ARTICLES: First step is to verify whether articles of association authorize the issue of right issue of shares. If not so then first alter the articles of association by including the provision of right issues.


STEP 2:

MEMORANDUM OF ASSOCIATION: Check whether in memorandum of association the authorized share capital is enough to issue further capital. If not so then alter the capital clause by increasing the authorized capital of the company in memorandum of association.


STEP 3:

COVENE FIRST BOARD MEETING: In the first board meeting, following resolutions are to be passed-

· Resolution for right issue to existing shareholders

· Resolution for approving of offer letter to issue shares on the basis of rights.


STEP 4:

LETTER OF OFFER: The letter of offer shall be issue to the existing shareholders and sent either through speed post or registered post or through electronic mode at least 3 days before the opening of the issue. The letter of offer shall contain the offer period which shall be open for minimum period of 15 days and maximum period of 30 days to accept or reject the offer. However the offer must be open for at least 3 days after the issue of the offer.


STEP 5:

RECEIPT OF APPLICATION MONEY: The shareholders who have accepted the offer must sent the application money.


STEP 6:

CONVENING OF SECOND BOARD MEETING: After the closure of offer period, the second board meeting Is convened where resolution for allotment of shares is passed. After passing of resolution company must allot the shares within 60 days of passing of the resolution.


STEP 7:

FILING OF FORM WITH ROC: Following forms are to be filed with ROC-

PAS-3 - After the allotment of shares, the company needs to file form PAS-3 with ROC within 30 days of passing of the resolution. Following attachments are required -

· List of allottees to whom the shares are allotted

· Certified copy of board resolution.

MGT-14- The company also needs to file form MGT-14 with ROC within 30 days of passing of the resolution. Copy of Board resolution is to be required as attachment.


STEP 8:

ISSUANCE OF SHARE CERTIFICATE:

If the shares are in physical form then within a period of 2 months from the date of allotment, the company shall issue share certificate to the shareholders excepted the offer.If the shares are in Demat form, then the company is required to intimate the depository on an immediate basis on allotment of shares.


CONCLUSION

Therefore, right issues are beneficial both for the company and existing shareholders. It is the fastest and most economical method of raising capital for the company where existing shareholders get preferential treatment of additional shares of the company at a discounted price.



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