Form to be filed to ROC in case of Rights Issue

When a company needs additional capital and keeps the voting rights of the existing shareholders proportionately balanced, the company issues Rights shares. The issue is called so as it gives the existing shareholders a pre-emptive right to buy new shares at a price that is lesser than market price. The Rights issue is an invitation to the existing shareholders to buy new shares in proportion to their existing shareholding.

A Right Issue of Shares offers a company a way to raise capital by issuing new shares directly to existing shareholders. The Companies Act, 2013, governs this process in India, ensuring fairness and transparency. This article provides a detailed breakdown of the steps involved in a Right Issue as per the Companies Act, 2013.

Understanding the provisions:

Section 62 (1) (a) of Companies Act, 2013 explains right issue as:

Issue of further capital
By company having share capital
By offering right to existing shareholders, as on the date of offer, to acquire shares
In proportion to their paid up share capital, as nearly as possible
By sending a Letter of Offer.

Reason For Rights Issue

As the company expands, it looks for ways of capital expansion, so the company turns to the issue of shares. In place of issuing shares to the public at large, which will bring about an imbalance in the voting rights of the existing shareholders, the company resorts to issuing additional shares to the existing shareholders in proportion to its current shareholding. So this resolves the purpose of additional capital while letting existing shareholders retain their voting rights.

Procedure For Rights Issue

According to Section 62 (1) of the Companies Act 2013, the procedure for issue of shares is as follows:
1. 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.
2. 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.
3. 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.
4. File MGT – 14: After the passing of board resolution, the company must file the MGT -14 within 30 days of passing of the Board Resolution. The form MGT 14 is mandatory for a public limited company. A true certified copy of the Board Resolution needs to be attached to MGT 14.
5. Receive application money: The shareholders must send the accepted application along with application money.
6. 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.
7. 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.
8. 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.

Additional Considerations:

In case of a private limited company, the offer period can be shorter than that specified, where 90% of shareholders have given their consent.
Companies can appoint advisors like legal counsel and merchant bankers to navigate the complexities of the Right Issue process.
If the offer is not accepted within the offer period, it will be deemed to have been rejected.
The Right Issue may not be fully subscribed. The company may need to explore alternative methods to raise the remaining capital.

Example of a rights issue:

Elon owns 300 shares of Tesla trading at Rs. 100 each. The company announces a rights issue in the 1:5 ratio. The rights issue is announced at a discounted price of Rs. 80 per share.
Elon’s Portfolio value = 300 shares * Rs. 100 = Rs. 30,000
Number of right shares = (300 * 1/5) = 60
Cost to buy the right shares: 60 shares * Rs. 80 = Rs. 4800
Total number of shares after exercising rights issue: 300+60=360
Revised portfolio value = Rs. 30,000 + Rs. 4800 = Rs. 3,480
Price per share post-rights issue: Rs. 34,800 / 360 = Rs. 96.7

FAQs

What is a Rights Issue?

A Rights Issue is a process by which a company offers its existing shareholders the opportunity to buy additional shares at a discounted price before offering them to the public.

What form needs to be filed with the ROC in case of a Rights Issue?

Form PAS-3, also known as the “Return of Allotment,” must be filed with the ROC after the shares have been allotted to the shareholders.