A company raises funds through various ways like by issue of shares, debentures, loans etc. One of the easiest method to induct the capital in the company is the issuance of shares under right issue. In right issue of shares a right is given to the existing equity shareholders, in the proportion of their existing holding in the Company. The Shareholders of the Company can either accept the offer, renounce the offer in favors of any other person or reject the offer. The proportion of voting rights is not affected under the Right Issue, if accepted by all the shareholders. It is advantageous for the existing shareholders as they get additional rights (shares) at a reduced/discounted price.
Why Right Issue? A company would offer a rights issue in order to raise capital. If current shareholders did choose to buy the additional shares, a company could use the funding to clear its debt obligations, acquire assets, or facilitate expansion without having to take out a loan from a bank.
Types of Right Issue
Renounceable Right Issue: Here existing shareholder has the right to transfer the right to subscribe rights issue of shares to anyone who may not be even shareholder of the company.
Non-Renounceable Right Issue: Here, the shareholder only has two options available, either to skip or purchase the shares. They are not allowed to transfer the right of subscribe.
Procedure
Check whether AOA provides any other provisions to offer the shares to existing shareholders.
Check whether authorized shares capital is sufficient for right issue of shares if not, increase the authorized share capital.
Decide on the following points before issuing notice of Board meeting:
Decide about the cut-off date.
Time period for which the offer will be open for subscribing the shares.
Issue the Notice regarding the Right Issue.
Pass resolution for the issuance of shares under right issue on the right basis in the ratio as may be decided by the Board.
Issue of Offer Letter to the existing shareholders of the Company in the proportion of their existing shareholding. Offer Letter must state:
Date of Opening & Closing of Offer which will be minimum 15days and maximum 30 days (In case of Private Company if the 90% Shareholders agrees than the time period may be shorter than prescribed).
Shares offered.
Right to renounce unless other provided by the articles.
Dispatch notice through registered post, speed post or through electronic mode or courier or any other mode having proof of delivery.
Notice must be issued at least 3 days prior before the opening of the issue.
Shareholders will have to provide the acceptance letter with application money or Renunciation letters within the period of offer letter. If no response is received from the shareholders then it will be considered that the offer has been declined by the shareholders.
No need to open Separate Bank account in case of Right issue.
File MGT-14 within 30 days of passing of Board resolution to issue the shares but Private companies are exempt from Filling MGT-14.
Issue notice of Board meeting regarding allotment of shares.
Pass Board resolution to allot the shares to the persons who have given the share application money.
Allotment of shares (max time allowed 60 days from the date of receiving application money)
File PAS-3 to ROC within 30 days of allotment of shares. Board resolution & List of allottees are to be attached.
Issue SH-1(Share certificate) within 2 months from the date of allotment.
Make entries of allotment in respective statutory registers maintained in the Company.
Advantages of Right Issue
Right issue of shares is an opportunity for current shareholders to increase their stake in a company at a reduced cost.
It is cheaper than a public share issue.
The company saves a significant amount of money, such as underwriting fees, advertisement cost and so on.
Right issues also help shareholders to protect their investment from the eventual dilution that will come when the company issues more stock. Dilution may occur if current shareholders sell their new stocks onto other traders – although this isn’t always guaranteed during a rights issue.
Disadvantages of Right Issue
The company may not be able to raise more funds and fail to achieve their target. This may happen if the existing shareholders of the company are not too keen to invest more.
The value of each share may get diluted if there are an increased number of shares issued.
Conclusion Share capital increases depending on the size of right issue. The company is able to generate positive cash flow (from financing), which can be used to improve its operations, for corporate expansion or takeover. Through right issue since shares are offered to the existing shareholders control remains in the hand of the existing shareholders.
At AJSH, we assist our clients in dealing with various corporate matters (Company incorporations, statutory audits, ROC Compliances, Company winding up), ITR Filings, TDS Compliance, and related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about right issue of shares, kindly contact us.
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