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Right Issue of Shares

A right issue of shares refers to an offer of rights given to the existing shareholders of the organization that provides them an opportunity to purchase additional shares directly from the company at a price lower than their market price. Right issue of shares not only helps the shareholders in getting the shares at a discounted price but also allows them to avoid the trading of the secondary market.

Right Issue of Shares

The right issue helps the company in adjusting the market price, having a positive cash flow, and achieving an effective EPS. Other than this, the right issue also increases the company's goodwill in the market and makes its employees satisfied with the organization. A point that should be noted here is, that the company can issue both equity and preference shares via this method of issuing.

Feature of Right Issue

The right issue of shares has the following features or characteristics:

  • The right issue of shares does not incur any underwriting fees for the company.
  • The right issue gives preference to existing shareholders and provides them the share at a lower price than the current market price which they can subscribe to on or before a specified date.
  • The right issue provides a right to the shareholder, not the obligation.
  • The right issue does not cause the dilution of ownership among the outsiders.
  • The shares that a shareholder can purchase through the right issue are based on the proportion of their existing shareholding.
  • Existing shareholders are free whether to accept the offer or reject it. However, if they reject the offer then their existing shareholding will be diluted post issue of additional shares.
  • The right issue can also be traded in the market by the existing shareholders until the date at which new shares can be purchased.

Process of Issuing Right Shares

1. Convene a Meeting of the Board of Directors

The first stage in the proper issuance of shares process is to call a meeting of the Board of Directors, for which notice, agenda, and notes to the agenda must be distributed to the Directors at least seven days before the meeting. The meeting can also be called at a later date to consider the issues on the agenda.

2. Choosing the Deadline and Completing the Letter of Offer

In its meeting, the Board will adopt the offer letter, which will define the number of shares to be offered to owners and the deadline for the procedure. Any director or directors may distribute the offer letter to the shareholders with the Board's permission. If a shareholder does not want to accept the offer, then the letter must also state that the shareholder can renounce his/her share in favor of somebody else.

3. Renunciation of the Offer

Shareholders who have received the offer letter have the option to accept or reject the offer in whole or in part, or to renounce the offer in favor of someone else.

4. Time-period of Offer Letter

The letter of offer must be sent to all existing shareholders by registered mail, speed mail, electronic mail, courier, or any other method with evidence of delivery at least three days before the issue opens.

Furthermore, the offer should be kept available for a while not less than fifteen days or such shorter number of days as may be prescribed, but not more than thirty days from the date of the offer, after which the offer will be assumed to have been denied if not accepted.

5. Rejection of Offer

If a shareholder does not subscribe to the share then it is assumed that he/she has rejected the offer. In such a case, directors can dispose of the shares as they see fit which is not detrimental to the firm as well as the shareholder.

6. Receipt of Share Application Funds from Shareholders

At this step, the company will receive the funds from the shareholders who have accepted the offer before the closing date.

7. Convene a Board of Directors Meeting for Allotment of Shares

Now, the company will convene a meeting of BoD to get the approval on the allotment of shares to shareholders from whom the company has received the payment as well as to authorize any director to complete the further steps of the process.

8. Reporting to the Ministry

As required by section 39 of the Companies Act, 2013, the company must file form PAS-3 within 30 days of the Board meeting to report to the Ministry.

9. Issuing Share Certificates

After reporting to the ministry, the company will issue the share certificates within 60 days of the allocation. These certificates must have the sign of the companies' two directors and also the company's seal, if applicable, as mandatory by section 56 of the Companies Act, 2013.

10. Payment of Stamp Duty

This is the last step in this process in which the company has to pay the applicable stamp duty on the share certificate that is given to the shareholders. The rates of the stamp duties are as per the rates in the state where the company has its registered office.

Rights Issue Date

Various dates included in the process of right issue of shares are as follows:

  • Date of the Record
    The record date is a deadline for determining whether shareholders are eligible for the rights issue or not.
  • Date of Publication of the Issue
    The issuing date is the first day when people can apply for the rights issue.
  • Date of Issue Closure
    The deadline for applying for the rights issue is the closing date. After the issue closure date, no applications will be accepted.
  • Trading Dates for Rights Entitlement
    The dates when the company can trade their rights entitlement on the stock exchange after renouncing them in the market is called the trading date for rights entitlement. The trading begins on the issue opening day and usually ends three to four working days before the issue closes.
  • Date of Allotment
    On this date, the company completes the process of allotment of the right issue after getting the applications and checking the rights entitlements Demat holding list.
  • Credit Due Date
    After the completion of the allotment of shares, the shares are credited to the Demat account of the shareholder on the credit due date.

Significance of the Right Issue of Shares

To raise additional money, a corporation issues the right shares. The following are the most prevalent reasons for a corporation to choose a rights issue over other public offerings:

  • To lower the company's debt-to-equity ratio.
  • Companies that are cash-strapped and don't want to add to their debt burden by taking out loans.
  • For the objectives of business expansion, acquisition, takeovers, and other general corporate reasons.
  • In a project where the company can't take debit or loan due to non-availability or less suitability or where taking debt is expensive for the company.

Advantages of the Rights Issue

The rights issue has a number of advantages for both the shareholder and the corporation.

Benefits to the company

  • The fastest way for a corporation to raise capital is through a rights offering.
  • It is a low-cost affair for the corporation because it saves money on underwriters' fees and advertising costs.
  • Existing shareholders' trust is maintained by presenting a discounted offer to them as a thank you for being a part of the company.
  • The corporation can raise more money without adding to its debt load.

Benefits to Shareholders

  • Right issues are beneficial for the existing shareholders because these shares give them the opportunity to raise their ownership in the company at a price lower than the current market price.
  • By subscribing to the right issue, the existing shareholders save the relinquishing of their rights to the outsiders and retain their control in the organization.

Disadvantages of the Rights Issue

  • The existing shareholders' interests would be diluted as a result of the rights issuance.
  • One of the reasons the corporation is considering issuing the right shares is a need for cash due to a liquidity crunch. This can send the wrong message to investors, implying that a firm is struggling, which can harm the company's reputation and share price.
  • The rights issue would raise the number of shares in a corporation, distributing profits over a larger number of shares and lowering earnings per share (EPS).

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