An Understanding of Raising Additional Capital Through Right Issue By CS Annu Sharma


Dear Professionals,

In this write up I have sum up multiple aspects of Right issue under Companies Act, 2013 which is a form of funding through existing shareholders of a company via an offer to buy share not obligation, here you can get idea and information about compliances to be complied to issue shares under section 62 of Companies Act, 2013 and rules applicable thereto, In this article, we'll explore how rights issues work and what they mean for the company and its shareholders.

INTRODUCTION

The word “Right” connotes certain advantage to its holder. In order to increase the subscribed/Paid-up Share Capital of a Company, shares are issued on Rights basis to its existing shareholders in proportion to their holdings or a decided ratio in the subject Company for consideration. The shares which are offered for subscription to the existing shareholders are usually at a price that is lower than the existing market price of the shares.

By issuing shares on Rights basis a Company can have access to additional funds with no extra cost. This is a major advantage and an important reason why many companies are moving more and more towards Rights Issue for catering to its additional financial requirement as opposed to borrowings from banks and other financial institutions which involve a lot of formalities/ documentations and also additional interest cost.

WHY WOULD A COMPANY ISSUE A RIGHTS OFFERING?

Companies most commonly issue a rights offering to raise additional capital. A company may need extra capital to meet its current financial obligations. Troubled companies typically use rights issues to pay down debt, especially when they are unable to borrow more money.

However, not all companies that pursue rights offerings are in financial trouble. Even companies with clean balance sheets may use rights issues to raise extra capital to fund expenditures designed to expand the company's business, such as acquisitions or opening new facilities for manufacturing or sales. If the company is using the extra capital to fund expansion, it can eventually lead to increased capital gains for shareholders despite the dilution of the outstanding shares as a result of the rights offering. 

STATUTORY PROVISIONS OF RIGHT ISSUE OF SHARES:

The issue of Share on Rights basis is covered under Section 62 of the Companies Act, 2013 and Companies (Prospectus and Allotment of Securities) Rules, 2014.

ELIGIBILITY:

Shareholders as on a particular cut-off date are eligible to participate in the Rights Issue of the Company.

SENDING OF LETTERS OF OFFER:

Letters of Offer shall be sent to all eligible shareholders specifying the number of shares offered. The offer shall be made by notice and must mention the period within which the offer must be accepted and in case the same is not accepted within the timelines, offer shall be deemed to have been declined. The notice as aforesaid must be sent to all eligible shareholders at least 3 days before the opening of the offer. However, in case of a Private Company, a period shorter than 3 days may be allowed provided that such shorter notice is consented by not less than 90% of the shareholders of the Company.

MODE OF SENDING OFFER NOTICES:

Offer notices can be sent in any of the following modes:
  1. Registered post
  2. Speed post
  3. Any other electronic mode
  4. Any other mode having proof of delivery
OFFER PERIOD:

Offer to subscribe to the shares of the Company shall be open for a minimum of 15 days and a maximum of 30 days’ time period. However, in case of a Private Company, a period shorter than the 15 days may be allowed provided that the same is consented by not less than 90% of the shareholders of the Company.

RENUNCIATION OF RIGHTS:

Unless the articles of association of the Company provide otherwise, the right offered to the shareholders of the Company can be renounced in favor of any other person and the offer letter must contain a statement of this right.

POST OFFER:

Once the offer period closes, the Board of Directors of the Company shall arrange a meeting for allotment of shares to those shareholders who have accepted the offer and to dispose-off those shares which are not accepted by the shareholders in such manner which is not disadvantageous to the shareholders and the Company.

PROCEDURE FOR RIGHT ISSUE OF SHARES:

Following procedure should be followed by the Company intending to issue shares through Rights issue:

  • Issue notice for the meeting of the board of directors of the Company to consider issuing shares on rights basis, fixing the rights issue ratio, fixing a record date for issuing a letter of offers to the shareholders and time period for which the offer shall remain open.
  • Filing of form MGT-14 for Board Resolution for Rights Issue of shares within 30 days of the passing of the resolution.
  • Issuing Letters of Offers to all eligible shareholders of the Company.
  • Receiving subscription monies from the shareholders.
  • Once the offer is concluded, a meeting of the Board of directors of the Company shall be held for allotment of shares and thereupon for the issue of share certificates to all the allottees.
  • Payment of Stamp Duty on the allotment of shares should be duly made at the consideration amount as per state stamp duty rate applicable.
  • The share Certificates duly stamped, signed and executed should be allotted within a period of two months to the eligible shareholders.
  • Filing of return of allotment along with the list of allotees and the certified true copy of the Board resolution with the Registrar of Companies in form PAS-3 within 30 days of allotment.
  • Registers of members shall be updated duly after the issue and allotment process is completed.
ACCOUNTING TREATMENT FOR RIGHTS ISSUE:

The accounting treatment for rights issue is similar to the case when ordinary shares are issued at the premium since rights issue is usually above the face value but lower than the market price. Accounting entry shall be passed as follows:


Bank A/c
    To Share Capital A/c
    To Share Premium A/c
 
 
CRUX:

Rights issues are a way by which companies can raise equity capital by giving the existing shareholders the privilege to buy a specified number of new securities at a specified price within a specified time frame. As a shareholder, you have three options with a rights issue. You can (1) Subscribe to the rights issue in full, (2) ignore your rights or (3) sell the rights to someone else. Through this brief article, I have tried to cover mostly all the aspects of the subject. Any observations, comment, and views are most welcome.

Click here to read the disclaimer


Write a Comment