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.
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:
- 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.
The issue of right shares is in the benefit of the existing shareholder and provides them with an advantage of applying for the shares at a discounted price and retaining their voting rights. A company can raise a significant amount of the share capital by resorting to the issue of rights shares.
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