Overview of Rights Issue

A company issues right shares to its existing shareholders in proportion to their shareholdings in order to raise subscribed capital. The company offers these shares at a price lower than the prevailing market price of its shares. By this method, a company can raise funds without incurring any additional cost. Moreover, right issue is a more feasible option than borrowing money from banks or financial institutions as it involves fewer documentation and compliance requirements.
Section 62 of the Companies Act, 2013 regulates the process of right issue and also provides pre-emptive right to the shareholders to subscribe to such shares. Therefore, the right issue acts as a formal invitation from the company to its existing shareholders to buy additional shares.

Benefits of Rights Issue

There are several advantages to the process of right issue in India, which can be summarised as follows:
Expansion of Operations
A company chooses the option of a right issue when it is planning to raise its capital and expand its operations, but also wants to avoid fixed payments of interest.
Non-availability of Funds
At times, a company needs to raise funds through a right issue when a debt/ loan funding is not available/ suitable or expensive to borrow.
Improves Debt-Equity Ratio
When a company aims to improve its debt-equity ratio or looking forward to acquire a new company, it may choose the route of the right issue to raise funds.
Improves Financial Health
When a company wants to pay off its debts to improve its financial health, it can choose the option of the right issue.

Key Features of Right Issue

The key features of the Right Issue in India are as follows:
A company issues right shares to increase its subscribed or paid-up capital;
When a company faces any financial shortage, it usually decides to issue the right shares without incurring underwriting charges;
A right issue gives preferential treatment to existing shareholders;
A company offers shares to its shareholders in proportion to their shareholdings;
All the existing shareholders enjoy the right to trade with other market participants;
The existing shareholders can also decline the offer of the right issue. However, if they do not subscribe to the additional shares offered, their shareholding gets reduced after the closure of the offer.

Conditions relating to Right Issue

A company needs to fulfil the following conditions before undergoing the process of Right Issue:
Every unlisted company making the offer of the right issue needs to get its securities converted into a dematerialised form. The KMP (Key Managerial Personnel), Directors and Promoters hold these securities as per the provisions of the Depositories Act, 1996;
Any shareholder who intends to subscribe the shares offered also needs to get their securities converted into dematerialised form;
A company needs to check whether its authorised capital is enough to issue the right shares. If not, then the company needs to alter the capital clause of its MOA (Memorandum of Association);
A company needs to verify whether the AOA (Article of Association) authorises the issue of the right shares or not. If not, then the company also needs to alter AOA by including the provision of the right issue;
A company can issue the right shares only to the shareholders of the company.

Who can apply for Right Issue?

As per section 62 of the Companies Act, 2013 the following entities can apply for the Right Issue:
Existing Shareholders A company can issue right shares to its existing shareholders in proportion to their shareholdings by sending them a letter of offer. However, a company needs to fulfil the following conditions for issuing rights shares:
A company needs to send a letter of offer to the shareholders specifying the number of shares offered. The shareholders must accept the offer in a minimum of 15 days and a maximum of 30 days;
If the shareholders do not accept the offer within the prescribed period, the same offer stands declined;
The letter of offer also includes a right to renounce the shares offered in favour of some other person;
After the expiry of the prescribed period or on receipt of an intimation from the shareholder regarding their rejection to the shares offered, the BOD (Board of Directors) may dispose of the shares in a manner advantageous to both the company and shareholders.
Employees
A company can issue the right shares to its employee under a scheme of ESOP (Employee Stock Option Plan) by passing a special resolution and complying with specified conditions.
Any other person
A company can also issue the right shares to any other person by passing a Special Resolution either for cash or for consideration other than cash. However, the registered valuer determines the price of such shares by making a valuation report subject to prescribed conditions.

Process for Issuing Right Shares

The steps involved in the process for Issuing Right Shares in India are as follows:
Prepare a list of Existing Shareholders
The directors need to prepare a list of existing shareholders together with the details of shares held by them. This is required to ascertain the number of right shares received by shareholders.
Draft necessary Documents
The directors need to prepare and draft the following documents:
Share Application Form;
Offer Letter for the right issue; and
Letter of Renunciation.
Notice for Board Meeting
A notice of the Board Meeting (BM) must be sent at least seven days before the date of BM. The notice must be in a manner specified under section 173 (3) and clause 1 of the Secretarial Standard -1.
Call a Board Meeting
In a Board Meeting, the directors need to discuss and pass resolutions on the following:
Approval of Letter of Offer;
Approval of Share Application Form;
Approval of Right Issue;
To fix a record date for the right issue;
To decide the proportion for right issue;
To fix the issue price of the right shares.
To authorise Director/ Company Secretary to sign the documents.
Prepare Minutes of Meeting
The Company Secretary prepares minutes of the BM (Board Meeting) and circulates the same to the directors within fifteen days, starting from the date of conclusion of that meeting. The company can send minutes by either of the following methods:
Hand Delivery;
Speed Post;
Registered Post;
Courier;
E-mail; or
Any other recognised electronic means.
File MGT-14
After passing the board resolution, the directors are required to file form MGT-14 with the ROC (Registrar of Companies) within thirty days. However, a public company is exempted from filing a board resolution concerning the right issue.
Dispatch Letter of Offer
The directors need to send a letter of offer to all the existing shareholders through a registered post/ speed post/ courier/ E-mail/ hand delivery, etc., at least three days before the opening of the issue. Further, the letter of offer must enumerate the number of shares offered and be kept open for a minimum of fifteen days and a maximum of thirty days. However, in case of private companies, a period less than three days and fifteen to thirty days is also valid if 90% of the shareholders have given their consent for the same.
Hold a Board Meeting
The directors of the company need to hold a board meeting after receiving the following from the holders:
Acceptance, Renunciation or Rejection of Right;
Share Application Money.
The company needs to send the notice for the meeting at least seven days before the date of the meeting.
Allotment of Shares within 60 days
The company needs to allot its shares within sixty days from the date of receipt of share application money. If the company fails to allot the shares, it needs to refund all the amount received within fifteen days from the date of completion of sixty days. However, if the company fails to refund the share application money, it will be liable to pay interest at a rate of 12% p.a., starting from the expiry of the 60th
Prepare a list of Shareholder
The directors need to prepare a list of shareholders containing the following details:
Name of the shareholders who have renounced their shares;
Name of the shareholders who have denied the offer of the right issue;
Name of the shareholders who have subscribed shares more than the entitlement under the right issue.
Call a Board Meeting
The directors of the company need to hold a board meeting within sixty days from the receipt of application money to discuss and pass resolutions on the following issues:
Allotment of shares to the applicants applied for shares;
Approval for issuing share certificates;
Approval for making entries in the Register of Members.
Prepare Minutes of Meeting
The Company Secretary prepares the minutes of the BM (Board Meeting) and circulates the same to the directors within fifteen days from the date of conclusion of that meeting. The company can send minutes by either of the following methods:
Hand Delivery;
Speed Post;
Registered Post;
Courier;
E-mail; or
Any other recognised electronic means.
Prepare a list of Allottees
The directors need to prepare a list of allottees for filing it with the ROC (Registrar of Companies).
File Form PAS-3
The directors of the company need to file the Return of Allotment in Form PAS 3 along with all attachments to the Registrar of Companies within thirty days of allotment of shares.
Make Necessary Changes in the Register
Lastly, the company needs to make mandatory entries in the Register of Members within seven days of passing of the board resolution for the allotment of shares.

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