A rights issue is a method through which a company offers its existing shareholders the right to purchase additional shares at a discounted price, usually in proportion to their existing holdings. This method allows companies to raise additional capital while maintaining the proportionate ownership of existing shareholders. In India, rights issues are regulated under the Companies Act, 2013, along with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 for listed companies.

This article outlines the legal requirements, processes, and compliance considerations under the Companies Act, 2013, with frequently asked questions (FAQs).

Legal Provisions for Rights Issues Under Companies Act, 2013

• Section 62 of the Companies Act, 2013

  • This section specifically governs the rights issue process.

  • As per Section 62(1)(a), when a company proposes to increase its subscribed capital by issuing further shares, such shares must be offered to existing equity shareholders in proportion to their existing holdings.

• Provisions Under Section 62(1)(a)

  • Offer to Existing Shareholders: The company must offer shares to existing shareholders first.

  • Notice Period: A notice must be sent to all eligible shareholders, giving them at least 15 days and not exceeding 30 days to accept the offer.

  • Right of Renunciation: Shareholders can renounce their rights in favor of another person.

  • Non-Acceptance: If the shareholder fails to respond within the stipulated period, the offer is deemed to have been declined.

• Filing Requirements

  • After allotment, the company must file Form PAS-3 (Return of Allotment) with the Registrar of Companies (ROC) within 30 days.

• Pricing of Rights Issue

  • The board has the discretion to fix the price for the rights issue. For listed companies, pricing must be in compliance with SEBI ICDR Regulations.

• Board Resolution

  • The decision to issue rights shares must be approved through a board resolution.

• SEBI Guidelines (for Listed Companies)

  • Listed companies must adhere to SEBI (ICDR) Regulations, 2018, which mandate additional disclosures and compliance.

Process for Rights Issue

Step 1: Board Resolution

• Pass a board resolution approving the rights issue, fixing the issue price, and setting the record date.

• Determine the proportion in which the rights shares will be offered.

Step 2: Notice to Shareholders

• Draft and send the offer letter to all eligible shareholders.

• The notice must specify the number of shares offered, issue price, record date, period of offer, and the right to renounce.

Step 3: Acceptance or Renunciation

• Shareholders can either:

  • Accept the offer fully or partially.

  • Renounce the offer fully or partially.

  • Reject the offer.

Step 4: Allotment of Shares

• After the closure of the rights issue period, the board must allot the shares to those who have accepted the offer.

Step 5: Filing with ROC

• File Form PAS-3 (Return of Allotment) within 30 days of the allotment.

Step 6: Issue of Share Certificates

• Issue share certificates or credit shares to shareholders' Demat accounts within 60 days of allotment.

Compliance Requirements

• Authorization in Articles

  • Ensure the company's Articles of Association (AoA) authorize the rights issue. If not, amend the AoA first.

• Approval from Shareholders

  • While a board resolution suffices for most cases, certain companies may require shareholder approval based on internal policies.

• Record Date

  • Set a record date to determine the eligible shareholders.

• Utilization of Proceeds

  • Funds raised should be utilized in line with the objectives stated in the offer letter.

Key Considerations

• Renunciation Rights: Shareholders can renounce their entitlement in favor of another person unless restricted by company policy.

• No Minimum Subscription: Unlike public offers, rights issues do not have a minimum subscription requirement.

• Offer Price: The price can be at par, premium, or discount.

• Return of Allotment: Filing Form PAS-3 within the stipulated time is critical to avoid penalties.

Frequently Asked Questions (FAQs)

- Is shareholder approval required for a rights issue?

• Generally, a board resolution suffices, but shareholder approval may be required if authorized in the company’s Articles of Association (AoA).

- Can rights shares be issued to non-shareholders?

• No, rights shares are initially offered only to existing shareholders. However, if shares are renounced, third parties may subscribe.

- What happens if shareholders do not respond to the offer?

• If shareholders neither accept nor renounce the offer, it is deemed to be declined after the expiry of the notice period.

- What is the time frame for completing a rights issue?

• The rights issue offer must remain open for a minimum of 15 days and a maximum of 30 days.

- Is SEBI approval required for rights issues?

• For listed companies, compliance with SEBI (ICDR) Regulations, 2018 is mandatory.

- Can a private company conduct a rights issue?

• Yes, both private and public companies can conduct rights issues under Section 62 of the Companies Act, 2013.

- Is it mandatory to file with the Registrar of Companies (ROC)?

• Yes, filing Form PAS-3 with the ROC within 30 days of allotment is mandatory.

- Are rights issue shares freely tradable?

• Yes, once allotted, rights issue shares are similar to other ordinary shares and can be freely traded.

- What are the tax implications of a rights issue?

• There is no tax liability at the time of subscription. However, capital gains tax may apply when these shares are sold.

- Can the company cancel the rights issue once announced?

• Once the process has commenced and shareholders have accepted the offer, cancellation may lead to legal complications and loss of credibility.

Conclusion

A rights issue is an effective way for companies to raise additional capital while providing existing shareholders an opportunity to maintain their shareholding proportion. The process, as outlined under Section 62 of the Companies Act, 2013, requires diligent compliance with statutory procedures, timely documentation, and regulatory filings. While it is relatively simpler compared to public offers, adherence to regulatory timelines and proper communication with shareholders are critical to ensuring a smooth and successful rights issue. Consulting with legal experts can help mitigate compliance risks and streamline the process.