By Rupin Chopra and Shantam Sharma
In the dynamic landscape of corporate finance, the rights issue emerges as a pivotal mechanism, enabling companies to raise capital while offering existing shareholders the opportunity to maintain their stake. Under the Companies Act 2013, Section 62 lays the foundation for this process, providing a fair and equitable path for companies to expand their capital base. This provision has recently come under the spotlight with the case of BYJU’S, India’s edtech giant, which navigated through turbulent waters to secure a fully subscribed $200 million rights issue[1].However, navigating the complexities of a right issues requires careful consideration of regulatory compliance, shareholder interests and legal ramification. In this article we will delve into the procedure of rights issue and the benefits of rights issue.
Illustration:
Let’s assume that an investor hold 100 shares of ABC Ltd., with each share valued at Rs. 10. After the company’s announcement of a rights issue at a ratio of 2:5, it means that for every 5 shares an investor holds, they will be eligible to purchase 2 new shares. The company has set discounted price of Rs. 6 per share for the new shares.
Before the rights issue, the value of the investor’s portfolio is calculated as follows:
Investor’s Portfolio Value (before rights issue) = 100 shares x Rs. 10 = Rs. 1,000/-
Number of rights shares to be received = 100 x 2/5 = 40.
To acquire the new shares the investor would pay = 40 x Rs. 6 = Rs. 240
Total number of shares after exercising the rights issue = 100 + 40 = 140.
Revised value of the portfolio after exercising rights issue = Rs. 1,000 + Rs. 240 = Rs. 1,240.
Who can apply for Rights Issue?
According to Section 62 of the Companies Act, 2013, the entities eligible to apply for rights issue are as follows:
- Existing Shareholders[2]A company may issue rights shares to its existing shareholders. A company may issue rights share to its current shareholders based on their current holdings by providing them with a letter of offer. However, certain conditions must be met by the company prior to issuing these shares:
- The company is required to send a letter of offer to its shareholders, indicating the number of shares available for purchase. Shareholders are under the obligation to respond to the offer within a timeframe of at least 15 days and not exceeding 30 days.
- If the shareholders fail to accept the offer within the designated timeframe, the offer is considered declined.
- Additionally, the letter of offer allows the shareholders to transfer their right to purchase to another individual.
- After the expiration of the specified period or upon receiving notification of rejection from the shareholder, the Board of Directors has the authority to sell the shares in manner which is beneficial to both the company and its shareholders.
- Employees[3]A company may allocate right shares to its employees through Employee Stock Option Plan (ESOP) by passing a special resolution and adhering to the specified criteria.
- Any other person[4]
A company is permitted to offer right shares to any other individual by passing a special resolution, either for cash or non-cash consideration. However, the price of such shares is determined by a registered valuer, who prepares a valuation report subject to specified conditions.
Procedure for Rights Issue
The following is the procedure which a company needs to follow for rights issue:
Step 1: Hold a board meeting (As per Section 173(3) of Companies Act & Secretarial Standard – 1)
Dispatch a notice of the board meeting to all company directors at their registered addresses, at least 7 days prior to the meeting date, in case of urgent matters, a shorter notice may be issued.
The listed company should provide notification to the stock exchange at least two business days prior to the board of director’s meeting.[5]
Step 2: Pass the resolution
In the board meeting, the resolution needs to be passed for the following reasons:
- Approve the offer letter to issue shares on the basis of rights,
- Fixing the date, price of the shares and ratio for the rights issue
- Allocating the right issue shares to the existing shareholders.
Step 3: Letter of Offer[6]
Following the resolution’s approval, the offer letter must be dispatched to the existing shareholders via registered post or speed post or electronically before the rights issue opens. The letter should specify the number of shares available to each shareholder who will then have 15 to 30 days to accept or decline the offer.
Step 4: Filling MGT-14 with ROC
After passing of the board resolution, the company must submit MGT-14 to Registrar of Company (ROC) within 30 days. This requirement applies only to the public limited companies and not to private limited companies. Form MGT-14 should be accompanied by a duly certified copy of the board resolution.
Step 5: Accepting Application Money
After the expiration of the notice period or upon receiving earlier indication from the shareholder declining the offered shares, the board of directors may dispose them in a manner which they consider appropriate, provided it’s not detrimental to the shareholders or the company.[7] Shareholder who have accepted the application should send the accepted application along with it the application funds.
Step 6: Conducting Second Board Meeting
After receiving the application money, the company must conduct second board meeting within 60 days. The company is required to dispatch a notice of the board meeting to all company directors at their registered addresses, at least 7 days prior to the meeting date, in case of urgent matters, a shorter notice may be issued.
The listed company should provide notification to the stock exchange at least two business days prior to the board of director’s meeting.[8] Upon the passing the resolution for share allotment, the company must allot the shares within the same 60-day period.
Step 7: Filling of Form PAS- 3 with ROC[9]
After, the completion of second board meeting and the allocation of shares, the company is required to submit Form PAS- 3 to the ROC within 30 days. This form must be accompanied by certified copies of the list of shareholders to whom shares have been allocated and the board resolution.
Step 8: Issuance of Share Certificate
The final step in the rights issue involves issuing share certificate using Form SH-1. If the shares are in demat form, immediate intimation to the depository is necessary upon share allocation. However, if shares are issued in physical form, share certificates must be issued within two months from the allocation date.
Benefits of Rights Issue
Rights issue is a key tool used by the companies to boost their finances while treating their current shareholders fairly. By allowing existing shareholders buy more shares at a lower price, companies can raise more money without giving away too much ownership or borrowing expensively. The following are the benefits of rights issue:
- Opportunity for Existing Ownership: Rights issues enable the current shareholders to maintain or increase their ownership stake in the company without dilution from external investors.
- Cost-Effective Investment: Participating in rights issue may be more economical than purchasing shares in the open market, as the offering price is often discounted.
- Enhanced Sense of Ownership: By acquiring additional shares through rights issue, shareholders can strengthen their commitment to the company’s success and feel a greater sense of ownership.
- Efficient Capital Raising: Rights issue offer a direct and swift method for raising capital by providing additional shares to the existing shareholders. This facilitates quick access to funds for financing expansion plan, research and development projects, debt reduction etc.
- Capitalizing Shareholder Loyalty: The direct access to capital through rights issue allows companies to capitalize the loyalty and commitment of their existing shareholders. This foster a sense of involvement and support in the company’s growth among shareholders.
- Cost-Effective Funding: Compared to alternative sources of fund raising like debt financing or initial public offer (IPO), the rights issues are a cost-effective means of raising funds. They eliminate the underwriting fees and other associated costs typically incurred in IPOs, reducing the financial burden on the company.
- Ownership Retention: Rights issue reduce the company’s dependence on external investors, enabling it to maintain greater control and ownership retention. By offering shares to the existing shareholders first, companies ensure that ownership remains within the existing shareholders, thereby preserving autonomy and strategic directions.
Conclusion
In conclusion, right issue is a fundamental process through which a company offer additional shares to its existing shareholders, providing them with the opportunity to maintain or increase their ownership stake. The procedure of a rights issue involves several steps, holding a board meeting, passing the resolution, issuance of letter of offer to the shareholders, the receipt of application funds, allotment of shares and the filling of necessary forms with regulatory authorities. The concept offers various benefits to both the shareholders and the company. Overall, the rights issue serves as a cornerstone in corporate finance, enabling companies to raise funds and pursue growth opportunities in a manner that aligns with the interests of both the shareholders and the company’s long term success.
Ritvik Kashyap, Intern at S.S. Rana & Co. has assisted in the research of this Article.
[2] See Section 62(1)(a) of Companies Act, 2013
[3] See Section 62(1)(b) of Companies Act, 2013
[4] See Section 62(1)(c) of Companies Act, 2013
[5] See Regulation 29 of SEBI (LODR) Regulations, 2015
[6] See Section 62(2) of Companies Act, 2013
[7] See Section 62(1)(a)(iii) of Companies Act, 2013
[8] See Regulation 29 of SEBI (LODR) Regulations, 2015
[9] See Section 39(4) of the Companies Act, 2013 read with Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
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