Right Issue: How to Raise Capital in India

How to Raise Capital Through Right Issue in India: A right issue is a way for a company to raise additional capital by offering new shares to its existing shareholders. Here, the shares are offered at a discounted price, which allows existing shareholders to buy more shares in the company at a lower cost.

Under Section 62(1) of the Companies Act, 2013, a company must offer new shares to existing shareholders in proportion to their existing shareholding. So, if you own 10% of the company’s shares, you will be offered 10% of the new shares being issued.

There are several benefits to the right issue, including:

Increases capital without disturbing existing control of shareholders: 

A right issue does not dilute the voting rights of existing shareholders, as each shareholder has the same number of rights as they do shares. Hence, this means that existing shareholders can maintain their control of the company even after the right issue.

Right Issue Cost-effective: 

A right issue is a cost-effective way to raise capital, as there is no need to advertise or issue a prospectus.

Time-efficient: 

A rights issue can be a time-efficient way to raise capital, as it does not require a shareholder meeting.

Right Issue Does not dilute existing control: 

A rights issue does not dilute the voting rights of existing shareholders. Therefore, the existing shareholders can maintain their control of the company even after the rights issue.

No need to have a separate bank account:

A right issue does not require a separate bank account. Consequently, save the company money.

Procedure for issuing shares through a right issue:

Convene a board meeting: 

The board of directors must hold a meeting and pass a resolution to issue rights shares. Furthermore, the resolution must approve the terms of the rights issue, including the number of shares to be issued, the subscription price, and the deadline for acceptance.

Send a letter of offer: 

The Company must send a letter of offer to all existing shareholders, detailing the terms of the rights issue. Furthermore, the letter of offer must be sent by registered post, speed post, or electronic mail. Also, it must be received by shareholders at least three days before the opening of the issue.

Accept the offer: 

Shareholders have the right to accept or reject the rights issue. Accordingly, if they choose to accept the offer, they must pay the subscription price within the specified deadline.

Receive applications and application money:

 The Company must receive applications and application money from shareholders who have accepted the rights issue. Furthermore, the application money must be paid in full by the deadline specified in the letter of offer.

Convene a second board meeting: 

The Company must convene a second board meeting within 60 days of receiving the applications from shareholders. Accordingly, The board must review the applications and pass a resolution to issue and allot the shares.

File the necessary forms with the Registrar of Companies (ROC): 

The Company must file the following forms with the ROC within 30 days of the allotment of shares:

Form PAS-3:

This form is used to notify the ROC of the allotment of shares.

Form MGT-14:

This form is required to file by public companies only for the issue of shares. 

Issue of Share Certificates:

Demat Form

If the shares are held in Demat form. Then, the company must inform the depository immediately on the allotment of shares. Subsequently, the depository will then create a record of the shares in the name of the shareholder

Physical Form

If the shares are held in physical form. Then, the company must issue share certificates to the shareholders within 2 months from the date of allotment of shares. Also, the share certificates must be signed by at least 2 directors of the company.

Here are some additional details about the procedure for issuing shares through the right issue:

The subscription price for rights shares must be lower than the market price of the company’s shares. This way, existing shareholders are incentivized to accept the right issue.

The deadline for accepting the right issue is typically 15 to 30 days. Therefore, if a shareholder does not accept the offer within the deadline, their rights will lapse.

Furthermore, the company must receive the full application money from shareholders within the specified deadline. However, If the company does not receive the full application money, it may cancel the right issue.

The letter of offer must contain a statement of the right to renounce the shares: This means that shareholders have the right to sell their rights to someone else if they do not want to accept the offer themselves. This helps to ensure that all of the rights shares are sold.

Some of the drawbacks of right issues include:

It may not be enough to raise the amount of capital the company needs.

Further, it may not be attractive to all shareholders, especially those who are not interested in increasing their investment in the company.

Also, it can be complex and time-consuming to administer.

Important sections that need to be referred to while doing the right issue.

Section 179(3)

Section 62 (1) 

Rule-12 of  The Companies (Prospectus and Allotment of Securities) Rules, 2014 

If you are considering issuing rights shares, it is important to keep these important points in mind. By doing so, you can help to ensure that the right issue is successful.

Conclusion:

To sum up, Right Issue is a way for a company to raise capital by offering existing shareholders the opportunity to buy new shares at a discounted price. It is a relatively cheap and quick way to raise capital, and it does not dilute the value of existing shares. However, it may not be enough to raise the amount of capital the company needs, and it may not be attractive to all shareholders.