A right issue is an invitation to the existing shareholders to purchase additional new and fresh shares in the company. Instead of approaching the public, they prefer offering these shares to their existing shareholders. This type of issue gives the shareholders securities called rights. The existing shareholders can purchase new shares at a discount to the market price on a stated future date. The company is giving shareholders a chance to increase their exposure to the stock at a discount price.

Important Notes to keep in mind:

  • A right issue is one way for a company to raise capital often to pay down debt.
  • Shareholders can buy new shares at discount for a period of time.
  • As more shares are issued to the market with right issue, the stock price is diluted and will likely go down.

REASONS FOR OFFERING RIGHT ISSUE

 

Need of Capital: The main reason for a company raising a right issue is that they are in need of additional capital. When they want to fulfil their financial needs and objectives, they offer right issue. Most of the companies having these problems think that offering right issue will solve their problems or debt as they are also unable to borrow money.

Open new facilities and increase competition: Right issue is not offered by the only companies facing these problems. Companies with a good and healthy status and balance sheet also offer right issue to acquire competitor or open new facilities. For a shareholder, this can create capital gains.

Capitals affected: A rights issue affects two important elements of the company: Equity Capital and Market Capitalisation. So as we know that every new issue has some kind of diluting effect, this rights issue results in a fall of market price in proportion to an increase in the number of shares, the market capitalisation remains unaffected. However, if the market sentiment believes that the funds are being raised for an extremely positive purpose then price of the stock may just rise resulting in an increase in the market capitalisation. If a shareholder does not want to exercise the right to buy additional shares then he/she can sell the right as the rights are usually tradable. Alternatively, investors can just let the rights issue lapse.

Before buying the rights issue the shareholders should be sure about the company’s performance and not just buy them because the share price has fallen.

 

PROCEDURE FOR RIGHT ISSUE OF SHARES

  • First things first, you have to decide the following:
  1. Decide and make a list of shareholders to whom the rights issue will be offered and keeping in mind the shareholders eligible on the basis of a particular cut – off are only allowed to participate in the Rights issue of the company.
  2. Then, decide the period for which the offer shall be open.
  3. Finalise the value at which the shares will be allotted
  4. Lastly, draft a letter of offer.
  • Issue notice of board meeting along with the agenda seven days before convening of the meeting.
  • Summon the board meeting to pass the resolution.
  • Issue the letter of offer to the shareholders providing :
  1. The number of shares being offered to the respective shareholder.
  2. The offer period to subscribe the shares shall be opened for minimum of 15 days and maximum of 30 days. However, in case of a Private Company, a period shorter than the 15 days may be allowed provided that the same is consented by not less than 90% of the shareholders of the Company.
  3. Right of renunciation: Unless the articles of association of the Company provide otherwise, the right offered to the shareholders of the Company can be renounced in favour of any other person and the offer letter must contain a statement of this right.

Process of Renunciation:

  • The company gives offer of rights issue to the existing shareholder.
  • If the shareholder is not interested, he can renounce the rights in favour of some other person. In this way, shares can be issued to outsiders.
  • Letter of Offer must specify the rights of renouncement.
  • The shareholder has the right to exercise both rights, he can partly subscribe to shares and also partly renounce.
  • In this case, company will give Letter of renunciation as well along with offer letter.
  • In case of renunciation, shareholder will give Letter of Renunciation to Company.
  • Then the company shall receive the money from the person in whose favour it is renounced.
  • After the Board Meeting, the company will then allot the shares.
  1. Shall be dispatched through registered post or speed post or courier or any electronic mode or any other mode having proof of delivery.
  2. Three days gap before dispatching the offer letter and opening of issue shall be there.
  • Opening of issue and acceptance of money.
  • Post offer: Once the offer period closes, the Board of Directors of the Company shall arrange a meeting for allotment of shares to those shareholders who have accepted the offer and to dispose-off those shares which are not accepted by the shareholders in such manner which is not disadvantageous to the shareholders and the Company. Summon board meeting for the allotment of shares within 60 days of receipt of money.
  • Payment of Stamp Duty on the allotment of shares should be duly made at 0.10% of the consideration amount.
  • The share Certificates duly stamped, signed and executed should be allotted within a period of two months to the eligible shareholders.
  • File PAS-3 within 30 days of allotment with the following attachments :
  1. Certified true copy of resolution of allotment.
  2. List of allotted shareholders.
  • Issuance of share certificates to the allotted shareholders within 2 months of the allotment.
  • Payment of stamp duty on issuance of share certificates.
  • Registers of members shall be updated duly after the issue and allotment process is completed.

FOR YOUR INFORMATION:

  • Subscription to right issue can be done through cash.
  • According to the Companies Amendment bill passed by Lok Sabha, it is proposed that Rights Issue Offer Letter can be sent through Courier.
  • In the case of Conversion of Loan by Company in shares, Provision of Section 62 is not applicable. Special Resolution is required to be filed and it will be as per the Terms in the agreement.
  • As per Notification dated 05.06.2015, entire provision of Right issue of shares and section 62 will not be applicable to Nidhi Company.