Right Issue of Shares
Rights Issue of Shares
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Overview
According to the Companies Act of 2013, a “rights issue of shares” is the procedure by which a business offers new shares to its current shareholders in a proportion that is proportional to the number of shares that they already own in the firm. It is a method via which businesses can acquire extra capital from the shareholders they already have. Rights share issue is an offering of rights given to a company’s existing shareholders, allowing them to purchase additional shares directly from the company at a discounted price, rather than buying them through the secondary market. The number of additional shares that a shareholder can purchase depends on their existing holding.
The following is a list of important characteristics of a rights issuance of shares:
- The fundamental goal of a rights issue: The primary aim of a rights issue is to increase the capital available to the company. The funds raised can be used for various purposes, including financing expansion plans, reducing debt, funding acquisitions, or meeting operating cash requirements.
- Opportunity for Current Shareholders: In a rights issue, current shareholders will have the opportunity to purchase new shares in the company at a price that is proportional to the amount of shares they already own. The percentage of ownership that a shareholder had previous to the rights issue is used to calculate the number of shares that will be made available to that shareholder.
- Consideration for Shares: Unlike a bonus share issuance, shareholders in a rights issue are required to pay a predetermined amount for the shares they purchase, known as the issue price or subscription price.
- Approval of Shareholders: In certain cases, in order to proceed with the rights issue of shares, the shareholders must first give their approval at the Extra Ordinary General Meeting (EGM) / Annual General Meeting (AGM) by voting in favour of a specific resolution. The agenda item concerning the rights problem ought to be included in the notification of the Extra Ordinary General Meeting (EGM)/ Annual General Meeting (AGM).
- Offer Period: The rights issue is accepting submissions for a certain amount of time, which is referred to as the offer period. The shareholders have the chance to subscribe to the extra shares by paying the issue price within this time period. The duration of the offer period is normally decided by the Company and outlined in the notification about the rights issue.
- Trading of Rights Entitlements: When a company issues new shares through a process known as a right offering, the existing shareholders are often given rights entitlements. These rights entitlements reflect the right to subscribe for the new shares. These rights entitlements can be sold on the stock exchange, which gives shareholders the ability to sell their rights to other investors if they do not desire to subscribe to the new shares being offered by the company.
- Record Maintenance and Filing: The organisation has to ensure that appropriate records relating to the rights problem are maintained. These records should include board decisions, minutes of the EGM/ AGM, share certificates, and any other pertinent papers. In addition, the firm is responsible for making the required filings with the Registrar of Companies (RoC), which includes bringing the share registration up to date and submitting the return of allotment within the allotted amount of time.
Process
The procedure for issue of shares via right issue option involves the following:
- Issue of notice of Board meeting: According to Section 173(3) of the Companies Act 2013, the notice for the board meeting has to be sent minimum 7 days prior to the board meeting and must specify the agenda for the meeting.
- Convene the First Board Meeting: The Board meeting is held, and the resolution for issuing rights shares is passed. The rights issue does not require the approval of shareholders, and hence the board can proceed towards the issue.
- Issue Letter of Offer: On the passing of the resolution, the letter of offer is issued to all shareholders, and the same is sent through registered post or speed post. For shareholders to accept the offer a window period of 15 – 30 days is given that is to say the maximum time the shareholders can take to accept the offer is 30 days and the minimum period is 15 days. The offer is considered declined if it is not accepted before the expiry period. The offer must be open at least three days after the issue of the letter of offer.
- Receive application money: The shareholders must send the accepted application along with application money.
- Convene the Second Board Meeting: The company must convene the second board meeting, the notice of which must be sent 7 days prior to the board meeting. The required quorum must be present, and the resolution for the allotment of shares must be passed. On passing the resolution for allotment of shares, the allotment of shares must be done within 60 days of receiving the application money for the same.
- File the forms with ROC: The company must file the Form PAS -3, within 30 days from the allotment of the shares with the Registrar of Companies. The certified true copy of the Board Resolution and the list of the allottees must be attached to the form. Additionally, the MGT – 14 must be filed for both the allotment and issue of shares.
- Issue of Share Certificates: The share certificates must be issued; if the shares are in Demat form, then the company must inform the depository immediately on allotment of shares. If the shares are held in physical form, then the share certificates must be issued within 2 months from the date of allotment of shares. The share certificate must be signed by at least 2 directors. The share certificates must be issued in Form SH -1.
Advantages
- Infusion of New Cash: The most significant advantage of a rights issue is that it makes it possible for a company to get an infusion of new cash from the shareholders who already own shares of the company. This infusion of cash may be put towards funding a variety of endeavours, including the growth of the company, the purchase of additional assets, the conduct of research and development, the repayment of existing debt, or the fulfilment of requirements for working capital. It eliminates the need to rely on other types of finance and instead offers a direct source of funding.
- Proportional Allocation: A rights issue guarantees that current shareholders are issued additional shares in proportion to the amount of existing stock that they already own, which is referred to as “proportional allocation.” This indicates that existing shareholders have the chance to keep their current proportional ownership in the company by subscribing to additional shares of the company’s stock. It stops ownership from being diluted and enables shareholders to participate in the growth of the company on a proportional basis.
- Attractive Pricing Structure: In a rights issue, the issue price of new shares is often fixed at a reduced rate relative to the price that is currently being paid for shares on the market. This creates an attractive pricing structure for shareholders. This gives them the chance to purchase additional shares at a price that is more favourable to them. It presents a lucrative investment opportunity and encourages shareholders to take part in the rights offering.
- Preservation of Control: Existing shareholders are able to keep their power and influence over the company if they take part in a rights issue and buy some of the new shares being issued. Their proportionate ownership of the company and voting rights will not change as a result of the new shares being issued to them in the same proportion as their current shareholdings. Because of this, shareholders are able to maintain their voice in the decision-making processes of the organisation.
- Potential Increase in Share Value: A successful rights offering that results in the company obtaining extra funds and implementing growth strategies may increase the value of the company’s shares. The infusion of cash can lead to improved profitability, expansion into new markets, the creation of new products or services, and overall corporate growth, positively impacting the value of existing shares.
- Opportunity to Raise Stake: A rights issue provides current shareholders the option to increase their ownership percentage in the company. Shareholders who fully subscribe to their rights and potentially oversubscribe can purchase more shares, increasing their ownership stake. This is advantageous for shareholders who have confidence in the company’s future and wish to enhance their exposure to potential future profits.
- Flexibility and Inclusion: The rights offering makes it possible for all current shareholders, regardless of the amount of their shareholdings, to take part in the offering. It offers small shareholders an inclusive chance to invest and preserve their ownership in the company, which enables them to profit from the future growth of the company.
- Cost-effective Raising money: When compared to other forms of financing, such as public offerings or private placements, a rights issue is a more efficient way to raise money because of its lower transaction costs. This results in less complicated administrative and regulatory requirements, which in turn leads to lower transaction costs. The company can obtain the necessary money by appealing to its current shareholder base and capitalising on the dedication and loyalty of those shareholders.
Compliances
- Approval from the Board of Directors: The board of directors is required to vote in favour of a resolution that approves the right issuance of shares. The resolution should explain the total number of shares that will be issued, the price at which they will be sold, the proportional distribution of those shares to the company’s current shareholders, and any other pertinent information.
- Approval of Shareholders: in certain cases, in order to proceed with the right issue, the shareholders will need to provide their blessing at the EGM/ AGM in the form of a special resolution. The notification of the annual meeting of shareholders should include the agenda item that is relevant to the correct subject.
- Putting up the Letter of Offer: It is necessary for the company to put up a comprehensive letter of offer. Information on the right issue should be included in the Letter of Offer. This information should include the terms and conditions, issue price, subscription ratio, offer time, and the processes for subscribing to the new shares. It must be formatted in accordance with the requirements of the Companies Act of 2013 and any other applicable legislation.
- Sending Out the Letter of Offer: The company needs to send out the letter of offer to all of the shareholders who are already in place. It is important to send the Letter of Offer a good amount of time before the opening date of the offer. This will ensure that shareholders have adequate time to examine the offer and determine whether or not to participate.
- Offer Period: The right issue is available for purchase within a predetermined time frame that is referred to as the offer period. During this time period, shareholders have the opportunity to exercise their rights by subscribing to new shares at the price at which they were initially offered. The offer term needs to be specified very explicitly in the letter that is being sent out.
- Acceptance and Payment: Shareholders who want to subscribe to the new shares need to fill out the application form that is supplied together with the Letter of Offer, and they also need to make the payment for the shares at the issue price that has been stated. According to the information provided in the Letter of Offer, the payment can be paid using a variety of methods including a cheque, a demand draught or an electronic transfer.
- Allotment of Shares: Once the offer time has come to an end, the company should complete the process of allotting shares to the shareholders who have subscribed for them. According to the terms outlined in the Letter of Offer, the allotment will be distributed to each party in a manner that is proportional to their current ownership. The allottees are each given either share certificates or dematerialized shares of the company.
- Record Maintenance and Filing: The company should ensure that appropriate records relating to the correct issue are maintained. These records should include board decisions, minutes of the Board/ EGM/ AGM, as the case may be, share application forms, share certificates, and any other papers that are pertinent. In addition, the firm is responsible for making the required filings with the Registrar of Companies (RoC), which includes bringing the share registration up to date and submitting the return of allotment within the allotted amount of time.
What is included in this
FAQs
The practise of providing current shareholders of a corporation with the opportunity to purchase new shares in an amount that is proportional to their existing shareholding is referred to as a “right issue of shares.” It makes it possible for the Company to obtain extra cash from the shareholders it already has.
The fundamental goal of a right issue is to increase the amount of money that is available to the Company. The funds that are created through the right issue can be used for a variety of objectives, including the growth of a Company, the reduction of debt, the completion of acquisitions, the conduct of research and development, or the satisfaction of requirements for working capital.
Existing shareholders of the Company who are eligible to participate in a right issue are those shareholders who held shares as of the record date. The amount of shares that are made available to each shareholder is calculated by looking at how many shares they already own.
The time frame during which existing shareholders have the opportunity to purchase new shares through a right issue is referred to as the offer period. The precise offer time is described in the Letter of Offer, and shareholders have until the end of this period to submit their applications for the shares in order to be considered.
A right issue is beneficial to shareholders because it provides them with the option to preserve their proportional ownership in the company, raise their position, retain control and influence, and participate in the growth of the company and improved shareholder value.
