Upon incorporation, Companies specifies their authorized and paid up capital which Company deems suitable for operating the Company. However, post incorporation Company may find it relevant to infuse more funds in the Company by raising the capital in order to meet its working capital requirement and for expansion purpose.
It is prescribed under Companies Act, 2013 that whenever a Company wishes to bring about more capital in the Company by issuing shares, Company must give priority to the existing shareholders of the Company. Such issuance of shares to existing shareholders are known as Right Issue.
Provisions under Companies Act, 2013
Section 62 of Companies Act, 2013 states provisions of further issue of capital. Section 62(1)(a) provides:
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—
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.
This section explains that if any further capital is issued by the Company than Company should offer to the existing shareholders the right to subscribe shares in the proportion of their holding.
Conditions for Right Issue
Proviso of section 62 has prescribed certain conditions to be fulfilled for right issue:
- The offer shall be made by notice specifying the number of shares offered.
- Time limit to circulate offer letter should not be less than 15 days and not exceeding 30 days from the date of the offer.
- Companies (Share Capital and Debentures) Amendment Rules, 2021 which will be effective from April 1,2021 states that the time period within which the offer
- shall be made for acceptance shall be not less than seven days from the date of offer
- If offer is not accepted within offer period, then it shall be deemed to have been declined;
- Shareholder will have right to renounce the shares offered to him or any of them in favour of any other person; and the notice shall contain a statement of this right;
- After the expiry of the time specified in the notice, 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;
Process of Right Issue
- Check amount of authorised capital as if increase in paid up capital is more than the authorised capital then process to be followed to increase in authorised capital first thereafter right issue.
- Check article of association for all provisions regarding the right issue.
- Approach to any auditor for preparation of valuation report.
- Any director or person authorised by the Board will dispatch a notice to call for Board Meeting.
- Notice shall be given as per section 173 of Companies Act, 2013 read with secretarial standard 1 on Board Meetings.
- Conduct Board Meeting to consider:
-issue of shares
– finalise price on basis of valuation report
-finalise list of shareholders
– finalise draft of offer letter
- After assent of the board members circulate the offer letter as per specified time limit.
- File E form MGT-14 for issue of shares within 30 days of board meeting.
- After receipt of application money or at expiry of the offer period, call another board meeting for allotment of shares.
- At board meeting allot shares as per shares subscribed in offer letter.
- If shareholder has renounced its right to another person share will be allotted to that person.
- If shareholder has not reverted for the offer letter then Board may allot shares to any other person which is not prejudice in the interest of company and shareholders.
- File E form PAS 3 within 30 days to submit details of allotment.
- Issue shares certificate to the shareholders within 2 months from the date of allotment.
Process of Right issue is beneficial for both company as well as shareholders. Company can raise money from their existing shareholders and outsider does not get involved on the other hand shareholders gets pre-emptive right to hold more shares in the Company.