RIGHTS ISSUE OF SHARES 

"Rights Issue" means offering shares to existing members or shareholders in proportion to their existing shareholding through letter of offer including right to renounce the shares offered to the shareholders in favor of any other person.

Section 62 of the Companies Act, 2013 contains provisions for further issue of Share Capital by way of rights issue.

All the Companies i.e. Private Companies, Public Companies, Listed Companies as well as Unlisted Companies, shall follow Section 62 (1) (a) for issuance of Shares on right basis. The Companies whose shares are listed on Recognized Stock Exchange or Exchanges shall also follow Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 and the listing agreement (hereinafter referred as "SEBI (ICDR) Regulations 2009")

Accordingly, where in case of a Listed Company, the issue size in Rights Issue is equal to or more than Rs. 50 Lacs then such listed company shall follow the provisions of SEBI (ICDR) Regulations, 2009.

Example:

If a company has a paid up capital of Rs. 1,00,000 divided into 10,000 equity shares of Rs. 10 each. Shareholding of the company are as follows:

Mr. Ram– 4000 shares (40 %)
Mr. Laxman  – 2000 shares (20 %)
Ms.  Seeta– 4000 shares (40%)

Now, if company wants to raise capital of Rs. 50,000  divided into 5000 equity shares of Rs. 10  each by way of rights issue then company shall offer shares in the same proportion to his existing holding which are as follows:

Mr. Ram- Right to subscribe 2000 shares (40 % of 5000)
Mr. Laxman- Right to subscribe 1000 shares (20 % of 5000)
Ms. Seeta- Right to subscribe 2000 shares (40% of 5000)

Note:-  The offer made to the existing shareholding is not binding upon them, they can renounce his right in favour of any other person (whether Member or Not).

                    PROCEDURE:  RIGHTS ISSUE OF SHARES

Points to be noted:

1.     Attach list of allottees in form PAS-3 mentioning therein – Name, address, occupation if any and number of securities allotted to each of the allottees and the list shall be certified by the signatory of the form PAS-3.

2.      Make Allotment of shares within 60 days of receiving of Application Money; otherwise it will be treated as deposits as per deposits rules.

3.      Letter of offer shall specify the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined.

4.    Section 23(2) of the Companies Act, 2013 clearly states that issue of prospectus is not necessary in rights issue whether with or without right of renouncement. Department has also clarified vide letter No. 8/81/56-PR dated 04.11.157 that issue of rights share is a ‘domestic concern’ and hence issue or registration of prospectus is not necessary.

Additional requirement for Listed Companies as per SEBI (ICDR) Regulations 2009

⇒ Record Date

(1) A listed issuer making a rights issue shall announce a record date for the purpose of determining the shareholders eligible to apply for specified securities in the proposed rights issue.
(2) The issuer shall not withdraw rights issue after announcement of the record date.
(3) If the issuer withdraws the rights issue after announcing the record date, it shall not make an application for listing of any of its specified securities on any recognised stock exchange for a period of twelve months from the record date announced.

⇒ Restriction on rights issue

No issuer shall make a rights issue of equity shares unless it has made reservation of equity shares of the same class in favour of the holders of outstanding convertible debt instruments, if any, in proportion to the convertible part thereof.

The equity shares reserved for the holders of fully or partially convertible debt instruments shall be issued at the time of conversion of such convertible debt instruments on the same terms which the equity shares offered in the rights issue were issued.

⇒ Letter of offer, abridged letter of offer, pricing and period of subscription

(1) The abridged letter of offer, along with application form, shall be dispatched through registered post or speed post to all the existing shareholders at least three days before the date of opening of the issue: Provided that the letter of offer shall be given by the issuer or lead merchant banker to any existing shareholder who has made a request in this regard.
(2) The shareholders who have not received the application form may apply in writing on a plain paper, along with the requisite application money.
(3) The shareholders making application otherwise than on the application form shall not renounce their rights and shall not utilise the application form for any purpose including renunciation even if it is received subsequently.
(4) Where any shareholder makes an application on application form as well as on plain paper, the application is liable to be rejected.
(5) The issue price shall be decided before determining the record date which shall be determined in consultation with the designated stock exchange.

⇒ Pre-Issue Advertisement for rights issue

(1) The issuer shall issue an advertisement for rights issue disclosing the information as mentioned in
regulation 55 of  Chaper IV SEBI (ICDR) Regulation 2009

(2) The advertisement shall be made in at least:
 → one English national daily newspaper with wide circulation
 → one Hindi national daily newspaper with wide circulation
 →one regional language daily newspaper with wide circulation at the place where registered office of the issuer is situated, at least three days before the date of opening of the issue.

⇒ Reservation for employees alongwith rights issue

The issuer may make reservation for  employees alongwith rights issue subject to the condition that value of allotment to any employee shall not exceed two lakhs rupees.

⇒ Utilisation of funds raised in rights issue

The issuer shall utilise funds collected in rights issues after the finalisation of the basis of allotment.

⇒ Appointment of merchant banker and other intermediaries 

The issuer shall appoint one or more merchant bankers, at least one of whom shall be a lead merchant banker and shall also appoint other intermediaries only those who are registered with SEBI, in consultation with the lead merchant banker, to carry out the obligations relating to the issue.

⇒ In-Principle Approval of Stock Exchange

The Company must obtain in-principle approval for its Rights Issue from the Stock Exchanges where the company shares are listed.

⇒ Documents to be submitted before opening of the issue

The Lead merchant Banker shall submit the documents mentioned in regulation 8 of chapter II of along with draft offer document.

⇒ Filing of offer document

File letter of offer atleast 30 days prior to file the same with designated stock exchanges. If SEBI specifies any change in it then issuer shall carry out such changes.The offer document filed with the board under this regulation shall also be furnished to the SEBI in a soft Copy in the manner specified in Schedule V of SEBI (ICDR) Regulation 2009

⇒ Format of Letter of offer

Specified in schedule viii of part A or E specified in regulation 57(2)(b).  If a company complies conditions mentioned in clause 1 of part E then it has required to make l.o.o according to Part E.

⇒ Minimum Subscription: Minimum subscription of issue size shall be 90 % of the issue size.

⇒ Issue Opening Date: according to regulation 11 of chapter II.

⇒ Pricing

The issue price shall be decided before determining the record date which shall be determined in consultation with the designated stock exchange.

⇒ Over subscription

No part of over subscription of Rights Issue shall be retained by the Listed Company; the amount has to be refunded

CONCLUSION

Rights issue of shares is a very suitable method for raising funds from the existing shareholders of the company apart from raising funds through public issue or private placement/ preferential allotment. Companies pursue Rights Issue as an avenue to raise funds for various reasons, ranging from expansion or acquisitions to paying down debts.

 Exceptions/ Modifications/ Adaptations

1. In case of private company-  In Sub-clause (i) of clause (a) of Sub-section (1) and Sub-section (2) of Section 62  the following proviso shall be inserted

Provided that notwithstanding anything contained in this sub-clause and sub-section (2) of this section, in case ninety percent, of the members of a private company have given their consent in writing or in electronic mode, the periods lesser than those specified in the said sub- clause or sub-section shall apply.  - Inserted by notification dated 5th june, 2015.

2. In case of private company - In clause (b) of Sub-section (1) of Section 62 for the words "special resolution", the words "ordinary resolution" shall be substituted . - Notification dated 5th june, 2015.

3. In case of Nidhi company - Section 62 shall not apply - Notification dated 5th june, 2015.

4.In case of Specified IFSC Public Company - In clause (a) of sub-section (1), the following proviso shall be inserted, namely:-

“Provided that notwithstanding anything contained in sub-clause (i), in case of a Specified IFSC public company, the periods lesser than those specified in the said sub-clause shall apply if ninety per cent. of the members have given their consent in writing or in electronic mode.”. - Notification Date 4th January, 2017

5. In case of Specified IFSC Public Company -  Clause (b) of Sub- section (1) of section 62 for the words “special resolution” read as “ordinary resolution”. - Notification Date 4th January, 2017

6. In case of private company - clause (g) of Sub-section 3 of Section 117 shall not apply .  - Notification dated 5th june, 2015. (it means Private company does not need to file MGT-14 with ROC after taking decision of issue of shares)

Video of Rights Issue

 * * *

Writer –  Akash Vij
Email ID: Akashvij20@gmail.com

Disclaimer:  The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. For Authentication of Data/Information provided please refer the respective acts, law, rules, regulations and notifications. This is only a knowledge sharing initiative and writer do not intend to solicit any business or profession. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION.