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.
Understanding the Rights Issue Process
The rights issue is a method for raising additional capital by offering existing shareholders the opportunity to purchase additional shares in proportion to their current holdings. A rights issue is a corporate finance strategy employed by companies to raise capital without diluting the existing shareholder base.
This method of raising capital presents a range of benefits for companies seeking to raise capital. In an event that the shareholders wish to participate in the rights issue process, this method offers a straightforward and rapid way to generate funds by allowing existing shareholders to purchase additional shares. This approach enables the company to quickly secure the necessary capital to support initiatives like expansion, research, debt reduction, or other strategic projects. By engaging with shareholders who are already committed to the company, it also strengthens the relationship with these stakeholders.
If the shareholders wish to participate in the rights issues process, this method offers a cost-effective alternative to other fundraising methods. By opting for a rights issue, the company can bypass underwriting fees and other related expenses, making it a more economical choice without having the need to increase its liabilities. This approach allows the company to maintain greater control over its capital structure by reducing the need for external investors. By offering shares first to existing shareholders, the company ensures that ownership remains within the current shareholder group. This helps preserve the company’s independence and avoids increasing its liabilities, aligning with its immediate financial needs while safeguarding its autonomy.
This process is primarily governed by Section 62 of the Companies Act, 2013, which outlines the legal framework and procedural requirements that companies must adhere to while raising funds through this method.
While the rights issue process is straightforward in many cases, complications often arise when one or more shareholders are foreign entities or individuals. This article aims to explore the rights issue process under Section 62 and highlight the specific challenges encountered when dealing with foreign shareholders.
Reason For Rights Issue
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
- 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.
- 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.
- 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.
- 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.
- Receive application money: The shareholders must send the accepted application along with application money.
- 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.
- 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.
- 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.
FAQs
Form to be filed to ROC in case of Rights Issue – Private Company?
(a) PAS – 3 for return of allotment, and
(b) MGT – 14 for powers of the board under section 179 (3) (c) which states that a board resolution can pass it for the issue of shares; therefore, section 117 (3) (g) requires passing of resolutions in accordance with subsection (3) of section 179. Further applicant should file it with the ROC.
Registrars of Companies (ROC) under Form to be filed to ROC in case of Rights Issue?
Registrars of Companies (ROC) as per Section 609 of the Companies Act, 2013 for the various states and union territories have the primary responsibility of registering companies and LLPs formed in those states and union territories and ensuring that such companies and LLPs comply with the Act’s statutory requirements. These offices serve as a registry of records pertaining to the firms registered with them, which are open to the public for examination upon payment of the authorized price. The administrative supervision of these offices is under the Central Government through the respective Regional Directors.