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.
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:
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:
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:
Advantages of the Rights Issue
The rights issue has a number of advantages for both the shareholder and the corporation.
Benefits to the company
Benefits to Shareholders
Disadvantages of the Rights Issue