Table of Contents
Introduction
Companies need money to keep their businesses running smoothly. Sometimes, they need extra funds for growing, improving, or paying off debts. To get this money, they can ask their existing shareholders to pitch in. One common way to do this is through something called a ‘right issue of shares.’ This method is governed by Section 62 of the Companies Act, 2013. In this article, we’ll explain what is right issue, process for right issue and all the important things you should know about it.
What is Right Issue as per Companies Act, 2013
As per Section 62(1) of the Companies act, 2013 if a Company intends to increase its paid-up share capital by fresh issue of shares, then these should be offered to existing shareholders in proportion of number of equity shares held by them.
The main objective of a right issue is the introduction of money in the company to fulfil its business needs without introduction of outsiders. Right issue ensures equal distribution of shares among the present shareholders so that the proportion of voting rights is not affected by such fresh issue of shares.
Process for Right Issue of Shares or Securities
If a company wishes to offer shares or securities to its existing shareholders through right issue, it needs to follow the below mentioned process:
- Firstly, check whether the company has enough authorized share capital to increase its paid-up capital. If no, then the company needs to increase its authorized share capital.
- If the company has sufficient authorized share capital, then call and hold a board meeting to approve the right issue.
- Send the offer letter to the existing shareholders to accept or renounce the issue in favour of someone else. The offer letter should include the information regarding the number of shares offered, total size of issue, issue price etc.
- The notice for offer shall be sent by registered post or speed post or electronic mode. The offer letter shall be sent atleast 3 days before the opening of the issue. The offer period shall be open for a period not less than 15 days and not exceeding 30 days.
- When the capital money has been deposited by the shareholders and allotment is made, the company is required to file a return of allotment in E-Form PAS-3 within 30 days of such allotment.
- In case of Public companies, file the allotment resolution in E-Form MGT-14 with the Registrar.
- Issue share certificates within two months of allotment.
Important Points for Right Issue
- If the shareholder is not interested in taking the shares, then he can renounce the offer of shares in name of any other person who may or may not be the member of the company.
- The offer letter must contain the right to renounce unless it is prohibited by the articles of association of the company.
- Valuation report is not required for right issue made at face value or premium.
- The share application money should be deposited in the share capital account of the company and not in the regular current account of the company used to carry out day to day business activities.
- The company can use the money received only once it files E-Form PAS-3.
- The offer period shall be open for a period of not less than 15 days and not exceeding 30 days. However, in case of private companies if 90% of members have given their consent in writing or in electronic mode, then the lesser period other than the specified period may apply.
- The consideration for right issue can be received in cash, in kind or by any other banking channels.
- As per rule 13 of The Companies (Share Capital and Debentures) Rules, 2014, right issue can be done for equity shares, fully convertible debentures, partly convertible debentures or any other securities which shall be converted into equity share at a later date.
Sample Resolution for Right Issue
“RESOLVED THAT pursuant to section 62(1)(a) and other applicable provisions, of the Companies Act, 2013 the consent of the Board of Directors of the Company be and is hereby accorded for the allotment of …………………. (Mention number of shares/securities) Equity Shares of Rs………….. (Mention face value) each of the Company from which the Company has received share application money aggregating to Rs……………….. (Mention total money received). The additional shares have been allotted to the following investors:
Sl No. | Name & Occupation of Allottees | Address of Allottees | Nationality | No. of Equity Shares | Total Amount Paid |
1 | ABC | XYZ | Indian | ………… | ………… |
|
| Total |
|
|
|
RESOLVED FURTHER THAT the said Equity Shares shall rank pari-passu with existing Equity
Shares in all respects.
RESOLVED FURTHER THAT any Director of the Company be and is hereby authorized to file Return on Allotment of aforesaid shares with the Registrar of Companies.”
Conclusion
In conclusion, a right issue is a smart move companies use to get more money while letting current shareholders keep their ownership. By knowing why, how, and what’s involved in a right issue, companies and investors can choose wisely to match their goals. Just like with any big company decision, it’s important to think about both the good and bad sides to make sure everyone benefits the most.
