A company needs funds to run a business smoothly. Funds can be raised by a company in numerous ways. One of them is through rights issue of shares. Under this company invites existing shareholders to buy additional shares of the company in a ratio that is proportional to their existing holdings with the purpose of ensuring equitable distribution. However, Shareholders are not obligated to purchase these shares. In this segment, we will discuss more on the rights issue of shares
Legal provision of rights issue
- Section 62(1) of the Companies Act 2013 provides for the rights issue of shares. A company may issue more shares under Section 62(1) of the Companies Act of 2013 if it intends to raise funds through a new issue of shares.
- The process convenes a Board meeting followed by the circulation of a letter of offer with the restrictions i.e, such shares should first be made available to current shareholders who, as of the offer date, are holders of equity shares of the company in the proportion to their existing holdings. Through this, a company can raise funds without incurring underwriting fees.
- Section 62 also provides the shareholder to renunciate this right to some other person who is not a shareholder of the company
Why do companies issue rights share?
- A business may need a sizable amount of capital when trying to expand its operations. To avoid making fixed interest payments, they can prefer to choose equity instead of debt. A rights issue may be a more expedient means of raising equity money also through a rights issue a company can raise funds without incurring the underwriting fees again.
- The rights issue provides advantages to qualified shareholders by enabling them to purchase additional shares. A company can raise capital for the expansion of business and for payment of debt.
The procedure of rights issue
- A board meeting is called by notice in order to get approval for the rights issue of shares and on the letter of offer which shall include the right to renunciate.
- The letter of offer is sent to the shareholders via registered post or speed post or through electronic mode at least three days before the opening of the issue. The offer is given to the shareholders for acceptance for a time duration that is not less than 15 days and does not exceed 30 days from the date of the offer after which it shall be deemed to have declined.
- Upon receiving acceptance the company receives the share application money from the shareholders and the rest of the shares which are not subscribed to are disposed of by the director of the company in such a way it is not disadvantageous to the shareholders.
- A board meeting is again held to make decisions regarding the allotment of shares.
- In accordance with the 2013 Companies Act’s section 39 requirements, the company is required to submit form PAS-3 within 30 days of the Board meeting.
- When shares are kept in de-materialized forms and the company is listed, corporations are required to notify depositories of the allocation of shares.
- Share certificates are issued and record the allotment in the register of shares.
Advantages of right issue for shareholders
- Existing shareholders gain from the rights issue of shares and also retain their voting rights.
- When the company raises money for purposes such as raising wealth and the expansion of business then investors stand a chance to gain from them in the long run.
A very well-established method of obtaining capital from current shareholders is through a rights issue of shares. Your personal investing goals and budget should always serve as the foundation for your investment choices.