RIGHTS ISSUE

Shares confer fractional ownership in the Total Share Capital of the company. Shareholders are owners of the company as they invest their money by way of subscribing to the shares.

Rights issue is a method of raising capital from the existing shareholders of the company.

Rights issue is termed as further issue of share capital that is first offered to the existing shareholders. It is a right conferred upon the members by the statue whenever further issue of shares takes place.

The Section 81(1)(a) of the Companies Act, 1956 confers such right on the existing shareholders.

Timing

Further issue of shares can be made only, after 2 years from the formation of the company or at any time after one year from the 1^st allotment of shares whichever is earlier.

Allotment of shares must be done on a proportionate basis.

Procedure

Offer to be made by Notice specifying the number of shares. Offer period is 15 days.

The shareholders are not under an obligation to accept the shares offered to them.

Rights issue in case of Listed Companies:

When the shares/other securities of a Public Company are listed and traded in a Stock Exchange, practically rights issue cannot be made easily. Reason behind this statement is that, “a person who is a shareholder today may not be a shareholder tomorrow and the shares are freely transferable”.

Hence some other organized and regulated procedure must be followed in case of a Listed Public Company.

In case of a Listed Company, the procedures relating to rights issue are provided in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

Definition of “rights issue” – it means an offer of specified securities by a listed issuer to the shareholders of the issuer as on the record date fixed for the said purpose;

The ICDR regulation is applicable for rights issue when the aggregate value of specified securities offered is Rs. 50 lakh or more.

The issure company must appoint one or more Merchant Banker at least one of them must be a Lead Merchant Banker.[1]

Atleast 30 days prior to registering the prospectus or letter of offer with ROC, a draft offer document must be filed with SEBI.  If SEBI asks for any clarification, then the same must be answered and respective changes must be carried out by the issuer company along with the Merchant Banker. The offer document shall contain all the relevant material disclosures which are true and adequate in order to enable investors to take informed decision.

The lead merchant bankers shall exercise due diligence and satisfy himself about all the aspects of the issue including the veracity and adequacy of disclosure in the offer documents.

The company must obtain in-principle approval from the stock exchanges where the specified securities are listed or are proposed to be listed.

• A “RECORD DATE” must be fixed by the Company for determining the shareholders eligible to apply for specified securities proposed to be issued.
• After the announcement of the record date the rights issue cannot be withdrawn.
• If such a withdrawal is proposed, the issuer shall not make an application for listing of any of its specified securities for a period of 12 months from the record date. Exception to such a restriction granted to the shares allotted pursuant to conversion option or exchange of convertible securities allotted prior to the record date.
• A “RESTRICTION” has been imposed on the company if it has outstanding fully/partly compulsorily convertible debt instruments at the time of making rights issue. In such a case, the issuer must have a made a reservation of the same class of equity shares in favor of the holders of the debt instruments in such convertible proportion.
• The equity shares so issued to the holders of such debt instruments shall be issued on the same terms as the equity shares.
• The issuer company has to issue an “ABRIDGED LETTER OF OFFER” + application form to all the existing shareholders 3 days before the date of opening of the issue through registered post or speed post.
• Shareholders who do not receive the application form can get the same by APPLYING IN PLAIN PAPER along with the application money.
• The ISSUE PRICE must be decided before the record date which will be determined in consultation with the designated Stock Exchange.
• The rights issue will be open for subscription for period of 15 days to 30 days.

• Pre-issue advertisement must be made in at least one English national daily, one Hindi national daily, and one regional language atlease 3 days before the date of opening of the issue.
• The pre-issue advertisement will contain,

1.      The date of dispatch of the abridged letter of offer+ application form.

2.      Centers were the shareholders can receive the application form in case they don’t receive them.

3.      A statement that shareholders may apply in plain paper for rights shares if have not received the application form or they are unable to obtain the duplicate forms.

4.      Format for applying the rights shares.

5.      A statement that the applications can be directly sent through registered post along with the application money to the address mentioned in the advertisement.

• The issuer may make reservation for its employees along with the rights issue such that the allotment shall not exceed Rs. 2 Lakhs.
• Once the basis of allotment is finalized the issuer shall utilize the funds of rights issue.

Further issue in case of Private companies and Unlisted Companies:

Board meeting must be convened and notice must be approved and dispatched to the members of the company. At the expiry of the offer period of 15 days, the accepted shares must be allotted to the respective shareholders by convening a Board Meeting.  E-form 2 must be filed with the Registrar of Companies (ROC) intimating the allotment of shares.

These are the procedures to be followed while raising capital by way of rights issue. The details given above are simplified for the understanding of the students. The text of the full regulation is available at www.sebi.gov.in

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[1] Merchant Bankers are intermediaries in the process of public issue of securities. They are Companies registered under Companies Act as well as registered with SEBI as an intermediary.