Procedure for Shares issue through Right Issue

Priyanka Bajpayee

16 Nov, 2020

Where the Company having a paid-up share capital at any time, proposes to increase the subscribed Share capital of the Company issue Right Shares is an exceptionally used method for increasing the share capital of the Company. As per Section 62 of the Companies Act, 2013, the Right Issue of shares is the shares issued by the Company to enable their existing shareholders to enhance their market divulgence.

The Reason behind issuing the Right Issue

By issuing the Right issue, the Company gets sufficient funds and besides gives the right to the existing shareholders of the Company to purchase the shares at a discounted price. Apart from raising the Capital of the Company, The Right issue bestows other advantages like-Provides ease for raising Fund, Converting the unsubscribed share capital to the Subscribed share capital of the Company, Favorable method of raising the Capital which results in expansion without Debt.

Key Criteria of the Right Issue

The criteria for issuing the Right issue is mentioned below-

1. Right shares are issued to increase the subscribed capital by the issue of further shares.
2. The right issue applies to all types of Companies i.e. Listed Public Company, Public Company, and Private Company.
3. The Shares are offered and issued to the existing shareholder of the Company in proportion to the paid-up share capital on their shares at the time of the Right issue by sending a letter of offer.

• The notice must be given to all the existing shareholders of the company, by offering them an option to take the shares offered to the shareholder by the Company.
• The information must be provided to the shareholders to decide about the number of shares he has opted to buy by giving him at least 15 days or a maximum of 30 days of notice.
• Dispatching the notice through registered post or speed post or through electronic mode or any other mode of option having a delivery proof that the notice is delivered to all the existing shareholders at least 3 days before the opening of the issue.
• The Company’s offer of issuing further shares shall be deemed to be declined if the shareholder does not convey to the company his acceptance.
• The right of renouncement must be disclosed in the notice.

What are the steps involved while issuing the Right Issue-?

The steps involved while issuing the Right Issue are-

1. Notice as per the norms of section 179(3) must be issued by the company to the shareholders of the company at least 7 days before the date of conducting the Board Meeting.
2. Pass the Board Resolution by conduct the Board meeting as per the Secretarial Standard-1 for approving the letter of offer which should enclose the right of renunciation.
3. Letter of the offer shall be sent to all the existing shareholders of the Company through registered or speed post or electronic mode.
4. In the case of Private Company, Section 62 (2) states that the Letter of Offer must be posted at least 3 days earlier than the date of opening of the issue.

However, in the case of Public Company, the notice must be posted at least 3 days prior to the date of opening of the issue.

The time duration for opening the Subscription-

• For the subscription, the offer shall remain valid for a minimum of 15 days and a maximum of 30 days. However, in the case of Private Company, the offer can be kept open for less than 15 days provided 90% of the members gives consent in writing (even by electronic mode).

Further, in the case of Public Company, the offer shall remain valid for the subscription for at least 15 days and a maximum of 30 days.

• In the case of Public Company, MGT-1 is required to be filed within a period of 30 days from the date of passing the Board Resolution. However, it is not applicable in the case of a Private Company.
• Accepting the Application money from the shareholders willing to subscribe to the Rights Issue. (Cash in terms of money is acceptable in both the Public and Private Company).
• After receiving the application money, Convene the Second Board Meeting as per SS-1.
  The Notice of Board Meeting shall be given at least 7 days before the date of Board Meeting Agenda and notes shall be attested with the Notice.

However, for Allotment of Shares, show the list of the allottee and Pass the Board Resolution.

• File PAS-3 within a period of 30 days from the date of allotment along with the CTC of Board Resolution.

Filing MGT-14 for both issue of shares and allotment of shares to ROC.

1. Within a period of 2 months from the date of allotment, issue a Share Certificate which shall be signed by 2 Directors. In addition, 1 Authorised representative shall also sign the Share Certificate, i.e. SH-1.
2. Obtain the Share Stamp within a period of 30 days from the date of the issue of Share Certificate.

Conclusion

The Right Issue Shares is a prescribed invite to the existing shareholders of the Company to buy the further, new shares in the company which gives the right to the existing shareholder to purchase new shares at a discounted rate. While issuing the Right issue, the motive of the company is to fortify an equitable distribution of shares. However, it does not affect the voting rights of the shareholders.