When a corporation wants to raise subscribed capital, it issues right shares to its current shareholders. As a result, the company is offering these shares for less than the current share price. Using this approach, a business can raise money without spending additional money. Furthermore, since the right issue requires less paperwork and compliance, it is a more practical choice than borrowing money from banks.

The right issue procedure is governed by Section 62 of the Companies Act of 2013 and also gives shareholders the preemptive right to subscribe to such shares. The right issue, therefore, serves as an official offer from the corporation to its current shareholders to purchase additional shares.

Different Types of Right Issues of Shares

Renounceable right issue

The shareholder has the choice to either exercise their right to purchase the shares or not to do so. In an open market, they can also exchange or sell their rights with other investors.

Non-renounceable right issue

Shareholders are not permitted to transfer their ownership to other investors. Instead, they simply have two choices: exercise the right or relinquish it.

Why Does a Public Limited Company Choose Rights Issue?

Public Limited Company goes for the rights issue of shares to increase their funds for:

• Growth and Expansion
• Establishing new products
• Paying off debt

As the business grows, it searches for means of capital expansion and resorts to issuing shares. The company chooses to issue more shares to the current shareholders in proportion to their holdings rather than offering shares to the general public, which would result in an imbalance in the voting rights of the existing shareholders. Thus, the need for additional capital is fulfilled while preserving the voting rights of current shareholders.

Following Advantages of Right Issue of Shares

The right issue procedure in India has a number of benefits, which can be summed up as follows:

1. Growth of company : When a business wishes to expand and raise cash but also avoid making fixed interest payments, it picks the option of the right issue.
2. Enhance debt-equity ratio : A company may decide to go for the right issue option to raise money when wanting to increase its debt-equity ratio or when planning to purchase a new company.
3. Non-availability of fund : A company may successfully need to obtain through a right issue if debt or loan finance is unavailable, unsuitable, or expensive to acquire.
4. Improves the financial condition: A Public limited company might select the right issue when it wishes to pay off its obligation in order to strengthen its financial condition.

Significant Features of Right Issue of Shares in India

The main features of the right issue of shares are as follows:

• A public limited company issues the right share to raise its subscribed or paid-up capital
• When a business experience a financial crisis, it typically decides to issue the appropriate shares without paying underwriting fees
• Existing shareholders receive preferential treatment in a right issue
• In accordance with their shareholdings, a firm offers shares to its shareholders
• All current shareholders have the option to decline the offer of the right issue, and they all have the ability to trade with market players. If they choose not to purchase the additional shares, their ownership will decrease once the offer is over.

Who Can Apply for the Right Issue?

Section 62 of the Companies Act of 2013 described that the following entities can apply for the right issue of shares

Existing Shareholders

A Public Limited Company might issue the right shares to its existing shareholders in proportion to their shareholdings. However, in order to issue the right shares, a firm must meet the requirements listed below:

1. The Company issues a letter of offer to the shareholders that must contain the specification of the number of shares. The shareholders have a minimum number of 15 days and a maximum of 30 days to accept the offer;
2. The offer letter also provides the right to renounce the shares given favour of someone else;
3. If the shareholders do not approve the offer within the specified time, the offer is deemed declined;
4. The BOD (Board of Directors) may dispose of the shares in a way that benefits the firm and shareholders after the allotted time has passed or upon receiving notification from the shareholders that they have rejected the shares offered.

Employees

By passing a special resolution and meeting certain requirements, a company may grant its employee the right shares under an Employee Stock Option Plan.

Any Other Individual

A company may also grant the right shares to any other person for cash or for a non-monetary payment. The registered valuer, however, establishes the cost of such shares by submitting a valuation report subject to the specified requirements.

Procedures for Right Issue of Shares

The following steps and processes are required to follow to issue the right shares:

1. Call a meeting of Board of Directors

Calling a Board of Directors meeting is the first step in the process of the right issue of shares. The Directors must be given at least seven days’ notice before the meeting, along with the agenda and any supporting materials. The meeting may also be called with short notice to discuss the agenda items.

2. Determine the cut-off date and number of shares

The Board of Directors shall approve the offer letter in its meeting, determining the number of shares offered to the shareholders and also specifying the deadline for the procedure. Any directors or directors may distribute the offer letter to the shareholders with the approval of the Board. If a shareholder chooses not to approve the offer, the right to renounce the shares in favour of another person must also be specified in the offer letter.

3. Renunciation of offer

The shareholders who received the offer letter can accept the offer completely or partially; reject the offer; or renounce the offer in favour of someone else.

4. Issue offer letter

The letter of offer must be sent to every existing shareholder by registered or speed mail, electronic means, courier, or any other means with proof of delivery at least days before the opening of the issue. The shareholders can take a maximum of 30 days and the minimum period is 15 days to accept the offer that may be prescribed, after which the offer, if not accepted, shall be regarded to have been denied.

5. File MGT-14

The company must submit the MGT-14 within 30 days after the passing of the board resolution. A public limited company must use the MGT 14 form with an original certified copy of the attached Board resolution.

6. Receive application money from shareholders

Shareholders who accept the offer before the closure of the offer date must pay the Company the share application fee.

7. Call the second board meeting

The Company must call the board meeting a second time, and notice must be given seven days before the meeting. The resolution for the allocation of shares must be approved and there must be the necessary quorum in attendance. Within 60 days of getting the application money for the resolution authorising the allocation of shares, the allocation of shares must be completed.

8. File the form PAS-3

The company must file the form PAS-3 with the registrar of the company within 30 days of share allotment. Both the list of allottees and the certified authentic copy of the Board Resolution must be included in the form. The MGT-14 must also be submitted for both the allotment and issuing of shares.

9. Issue of share certificate

If the shares are available in Demat form, the corporation must immediately notify the depository of the allotment of shares in addition to issuing share certificates. The share certificates must be issued within two months of the date of the share allotment if the shares are kept in physical form. At least two directors must sign the share certificate. Share certificates need to be printed on Form SH-1.

Conclusion

In brief, the right issue of shares is a well-known method of raising revenue. The rights issue enables the business to continue operating in a debt-free way. Existing shareholders will profit from the right issue of shares because they will be able to apply for the shares at a reduced price and keep their voting privileges. By using the rights issue, a company can raise enough amount of share capital.