Upon incorporation, a company determines its authorised and paid-up share capital based on its initial operational requirements. However, after incorporation, the company may require additional funds to meet working capital requirements, support business expansion, or finance future growth plans.

The Companies Act, 2013 provides that whenever a company proposes to raise further share capital by issuing shares, such shares must first be offered to the existing shareholders of the company in proportion to their existing shareholding. Such an offer of shares to existing shareholders is referred to as a “Rights 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:

1. The offer shall be made by notice specifying the number of shares offered.
2. Time limit to circulate offer letter should not be less than 15 days and not exceeding 30 days from the date of the offer.
3. 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
4. If offer is not accepted within offer period, then it shall be deemed to have been declined;
5. 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;
6. 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

• Verify the existing authorised share capital of the Company. In case the proposed increase in paid-up share capital exceeds the existing authorised share capital, the authorised share capital must first be increased before undertaking the Rights Issue process.
• Review the Articles of Association of the Company to ensure compliance with the provisions relating to issue of shares and Rights Issue.
• Obtain a valuation report from a Chartered Accountant, Registered Valuer, or other professional, as may be applicable.
• A notice convening the Board Meeting shall be issued by any Director or any other person authorised by the Board.
• The notice for convening the Board Meeting shall be issued in accordance with the provisions of Section 173 of the Companies Act, 2013 read with Secretarial Standard–1 on Meetings of the Board of Directors.
• 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 approval of the Board of Directors, circulate the offer letter to the shareholders within the prescribed time period.
• File e-Form MGT-14 with the Registrar of Companies within 30 days of passing the Board Resolution, wherever applicable.
• Upon receipt of application money or after expiry of the offer period, convene another Board Meeting for allotment of shares.
• At the Board Meeting, allot shares to the shareholders in accordance with the applications received pursuant to the offer letter.
• In case any shareholder renounces his/her right in favour of another person, the shares shall be allotted to such renouncee.
• In case the offer is not accepted by any shareholder within the stipulated time, the Board may dispose of such shares in a manner which is not prejudicial to the interests of the Company and its shareholders.
• File e-Form PAS-3 with the Registrar of Companies within 30 days of allotment for reporting the details of allotment.
• Issue share certificates to the allottees within a period of two months from the date of allotment.

A Rights Issue is beneficial for both the Company as well as its existing shareholders. Through a Rights Issue, the Company is able to raise additional funds from its existing shareholders without involving outside investors or diluting existing control. On the other hand, the shareholders receive a pre-emptive right to subscribe to additional shares in proportion to their existing shareholding, thereby enabling them to maintain or increase their stake in the Company.

Right Issue of Shares: Essential FAQs

1. What is a “Right Issue” of shares?

A Right Issue occurs when a company seeks to infuse more funds for working capital or expansion by offering new shares to its existing shareholders. Under the Companies Act, 2013, existing shareholders must be given priority to subscribe to these shares in proportion to their current holding.

2. What are the legal timelines for accepting a Right Issue offer?

• • Offer Period: The notice must specify an acceptance period of not less than 15 days and not more than 30 days.
  • 2021 Amendment: Effective April 1, 2021, the minimum time for acceptance has been reduced to not less than seven days from the date of the offer.
  • Deemed Refusal: If an offer is not accepted within the specified period, it is deemed to have been declined.

3. Can a shareholder transfer their Right Issue offer to someone else?

Yes. A shareholder has the right to renounce the shares offered to them in favor of any other person. The company’s notice must explicitly contain a statement informing the shareholder of this right to renunciation.

4. What happens to shares that are not accepted by existing shareholders?

After the offer period expires or if a shareholder provides an earlier intimation declining the offer, the Board of Directors may dispose of the unsubscribed shares. The Board must do so in a manner that is not disadvantageous to the company or its shareholders.

5. What are the primary procedural steps for a Right Issue?

1. 1. Capital Check: Ensure the proposed increase does not exceed the Authorized Capital; if it does, the authorized capital must be increased first.
   2. Valuation: Approach an auditor to prepare a valuation report to finalize the share price.
   3. Board Approval: Conduct a Board Meeting to approve the issue, finalize the offer letter, and list the shareholders.
   4. Circulation: Dispatch the offer letter to existing shareholders within the legal time limits.

6. Which ROC forms must be filed for a Right Issue?

• • Form MGT-14: Must be filed within 30 days of the board meeting approving the issue of shares.

Private companies are generally exempt from filing MGT-14 for Board Resolutions under Section 179(3) pursuant to MCA notification dated June 5, 2015

• • Form PAS-3: Must be filed within 30 days of the allotment of shares to submit the return of allotment.

7. What is the timeline for issuing the physical share certificates?

Once the shares are allotted at a board meeting, the company must issue the share certificates to the shareholders within two months from the date of allotment.