How to increase capital through RIGHT ISSUE ?

Right issue

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WHAT IS RIGHT ISSUE?

A Right Issue is a way by which companies can raise additional capital. It is defined under section – 62 of the Companies Act, 2013.  Under Right Issue, instead of going to the public for funds, a company gives its existing shareholders a Right to subscribe to newly issued shares in proportion or on pro-rata basis to their existing shareholdings in the company.

If Right Issue is made to the existing shareholders, they have an option or a right to accept it or not. If the existing shareholders do not want to subscribe, the company may offer Right shares (shares offered through Right Issue are called Right Shares) to any other person(s).  A Right Issue can be made to other persons also other than existing shareholders.

TYPES OF RIGHTS ISSUE OF SHARES

There are two main types of Right Issue of shares, which are as follows:

  • Renounceable Rights Issue: An existing shareholder of the company has the right to transfer his/her right to subscribe to the Right shares to anyone who may not be a shareholder of the company.
  • Non-Renounceable Rights Issue: The existing shareholders do not have the right to transfer his/her right to subscribe to Right shares to anyone. Here, the shareholder only has two options available, either to skip or purchase the shares.

PROCEDURE TO OFFER RIGHT ISSUE

1. Prepare Letter of Offer for Right Issue. (Prospectus is not required under Right Issue).

2. Convene a board meeting for-

  • authorizing the Right Issue of shares
  • approving Letter of Offer

3. Filing of MGT-14 for board resolution within 30 days of the passing of board resolution with ROC (Not applicable for private companies, However, public companies are required to file).

4. Timelines for the Letter of Offer:

  • Dispatch of Letter of Offer through registered post or speed post or through electronic mode at least three days before the opening of the issue. (Hand delivery of the Letter of Offer is not allowed).
  • Period of validity of offer to be between 15 to 30 days

Provided that only private company and IFSC public company can reduce these timelines subject to consent in writing or electronic mode of 90% shareholders.

5. Receive a letter of acceptance, renunciation, rejection of rights from shareholders. A shareholder can accept the part of the issue offered and renounce the other part of the offer also.

In case if the offer is renounced:

  1. The shareholder, to whom the offer has been made, shall write a letter to the company specifying his intention to renounce the offer.
  2. The person, in favour of whom the offer is renounced, shall deliver his acceptance letter along with the share application money.
  3. After the closing of the offer period, the company shall take note of the renunciation in the board meeting and allot the shares.
  4. In case of issue of preference shares, pass a a special resolution as per section 55 of the Companies Act, 2013 i.e., calling of Extraordinary General Meeting and passing of the special resolution.
  5. File e form MGT-14 (in case special resolution is passed) for filing of resolution within 30 days of passing of resolution with registrar along with explanatory statement.

In case if the offer is accepted:

  1. The shareholder, to whom the offer has been made, shall write a letter to the company specifying his acceptance of the offer.
  2. After the closing of the offer period, the company shall take note of the acceptance in the board meeting and allot the shares.

6. File e form PAS-3 for the return of allotment within 30 days of date of  allotment along with:

  1. List of allottees (to whom shares allotted)
  2. Board resolution/ special resolution (if applicable)
  3. Letter of offer

7. Issue of share certificates in SH-1 within 60 days of allotment to the shareholder, under the common seal of a company or signed by two directors or by a director and the company secretary, specifying the shares held by any person, shall be prima facie evidence of the title of the person to such shares.

8. Stamp duty adjudication as per the rates applicable to relevant states within 30 days of issue of share certificates. Payment of Stamp duty on the shares certificates issued.

9. Entry in register of members in MGT-1 within 7 days of allotment as per section-88 of the Companies Act, 2013.

If the company fails to maintain such register under section 88 of the Companies Act, 2013, the company and every defaulting officer shall be punishable with minimum fine of Rs. 50,000 which may extend to Rs.3 lacs. In the case of continuing default fine up to Rs.1000/- per day can also be charged.

VALUATION REPORT

As per section-62(1)(c) if any company proposes to issue new shares(except a right issue to existing shareholders or to employees under employees stock options), the price of such shares should be determined by the registered valuer.

Valuation report from a registered valuer is mandatory only in case of issue to existing non-resident shareholder where the price of such shares are determined by the valuation report.

#Registered valuer means a person whose name is entered in the register of valuers maintained by the central government, or any authority, institution or agency notified by it.

  • PENALTY

General penalty under section 450- the company and every officer in default or such other person in default shall be liable for fine up to Rs. 10,000 and where the contravention is a continuing one, with a further fine up to Rs. 1,000 for every day during the contravention continues.

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