Introduction:- A rights issue is a direct offer of shares to all the existing shareholders of the Company in proportion to their current holding. The company also sets a time limit for the shareholder to buy the shares. Companies pursue Rights Issue as an avenue to raise funds for various reasons, ranging from expansion or acquisitions to paying down debts.
Section 62 of Companies Act, 2013 contains provisions on “further issue of capital”, and enacts the principle of pre-emptive rights of shareholders of a company to subscribe to new shares of the company
Provisions of Section 62 of Companies Act, 2013 are mandatory for all Private companies, public companies, and listed as well as unlisted companies.
RELEVANT PROVISIONS OF COMPANIES ACT-2013:
Sec 62 (1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered:
a. to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:—
- the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;
- unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right;
- after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company;
PROCEDURE FOR ALLOTMENT OF SHARES ON RIGHT ISSUE BASIS:
- Issue notice in writing to every Director at least seven days’ before convening the Board meeting. [Sec 173 (3)]
- Convene a Board Meeting
- Pass a Board resolution for approving “Letter of offer”. The offer letter shall include right of renunciation also.
- Dispatch Letter of offer to all existing shareholders through registered post or speed post or through electronic mode at least three days before the opening of the issue.
- Receive acceptance, renunciations, rejection of rights from shareholders.
- Issue notice in writing to every Director at least seven days’ before convening the Board meeting. [Sec 173 (3)]
- Convene a Board Meeting
- Pass Board resolution for approving allotment and issue of shares.
- File E-form MGT 14 within 30 days of Issue of securities.
- File with Registrar a return of allotment in E-Form PAS-3 within 30 days of allotment of shares.
OTHER INFORMATION:
There is no prescribed format for “Letter of offer” to be issued, in case of right issue of securities.
Format of “Letter of offer” prescribed in Companies Act, 2013 is Pursuant to section 42 and rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014 and not for Section 62.
Letter of offer shall specify the number of shares offered and other information and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;
Attach with E-Form PAS-3:
- Board Resolution for allotment and issue of share.
- Letter of offer
- List of Allottees
List of Allottees attached with E-Form PAS-3 shall state the names, address, occupation, if any, of the shareholder and number of securities allotted to each of the allottees and the list shall be certified by the signatory of the Form PAS-3 as being complete and correct as per the records of the company.
Rights Issue by a Listed Company
However, in case of listed companies, in addition to section 62 of the Companies Act 2013, SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 also need to be complied with.
Record Date:
Record Date has to be fixed for the purpose of determining the shareholders who are eligible to apply for securities in the proposed Rights Issue.
The issuer shall not withdraw rights issue after announcement of the Record Date.
If the issuer opts to withdraw the rights issue after announcement of the Record Date, then the issuer shall not be eligible to make an application for listing of any of its securities on any recognized stock exchange for a period of 12 months from the Record Date.
However, listing of its equity shares is permitted if it is allotted pursuant to conversion or exchange of convertible securities issued prior to the announcement of the Record Date.
Rights Issue is not permitted, if there are outstanding fully or partly convertible securities issued prior to the commencement of the Record Date. However, Rights Issue is permissible, if sufficient reservation of equity shares of the same class has been made in favour of holders of such outstanding convertible instruments in proportion to the convertible part thereof.
Letter of Offer / Abridged Letter of Offer:
Abridged Letter of Offer, along with application form, shall be dispatched through post or speed post to all the existing shareholders at least three days before the date of opening the issue
The Letter of Offer shall be given by the issuer or lead merchant banker to any existing shareholder who has made a request in this regard.
Issue price:
The issue price shall be decided before determining the record date which shall be determined in consultation with the designated stock exchange.
Open for Subscription:
Rights issue shall be open for subscription for a minimum period of 15 days and for a maximum period of 30 days.
Payment option:
of the following two options, only one payment option can be given – part payment on application with balance money to be paid on calls; or – full payment on application.
Advertisement:
Pre-issue advertisement for rights issue should be given disclosing the following;
- the date of completion of dispatch of abridged letter of offer and the application form
- the centers other than registered office of the issuer where the shareholders can obtain the duplicate copies of the application forms
- a statement that if the shareholders have neither received the original application form nor in a position to obtain the duplication forms, they may make application in writing on a plain paper to subscribe to the rights issue
- a statement that the applications can be directly sent by the shareholders entitled to apply against rights entitlements through registered post together with the application moneys to the issurer’s designated official at the address given in the advertisement
- a statement to the effect that if the shareholder makes an application on plain paper and also on application form both his application shall be liable to be rejected at the option of the issuer.
Advertisement shall be made in at least one English national daily newspaper with wide circulation, one Hindi national daily newspaper with wide circulation and one regional language daily newspaper with wide circulation at the place where registered office of the issuer is situated at least three days before the date of opening of the issue.
There are other general obligations of issuer with respect to rights issue as per SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009.