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Right Issue of Shares: Step by Step Procedure

calendar14 Mar, 2020
timeReading Time: 4 Minutes
Right Issue of Shares

To raise subscribed share capital of a registered Company, additional capital shares are issued through Right Issue. However, instead of issuing shares to the public at large, the Company issue shares to existing shareholders of Company in proportion to their existing holding. It is an exceptionally used method to increase the share capital of the Company. According to Section 62 of Companies Act, 2013[1], the Right issue of Shares is explained. The Company, when issue shares on a discounted rate to the existing shareholders, it is known as Right Issue. This method is used to raise Capital of Company in indigent times of the Company.

This article will discuss the step by step procedure for Right Issue of Shares under Companies Act, 2013.

What is Right Issue of Shares?

The Right Issue of Shares is a formal invitation to the existing shareholders of the Company to buy additional new shares. The name Right Issue signifies that a right is given to the current shareholders to buy new shares at a discounted price as compared to the market price. To increase market exposure in the shareholders, Right Issue of Shares is done in the Company.

The main objective for Right Issue of Shares is to ensure equitable distribution of share to the shareholders of the Company with no effect on the existing voting rights of the shareholders.

What are the Key Objectives for Right Issue of Shares?

The Key Objectives for Right Issue of shares are as follows:

  • The Right Issue is done to increase the subscribed capital of the Company.
  • The shares are issued to the existing shareholders of the Company in proportion to their current share capital issued earlier.
  • The Right Issue is done by sending a letter of offer to the shareholders of the Company.
  • The notice of the issue of shares should be sent to the shareholders by offering them an option to take the shares offered to them.
  • The shareholders should answer the notice within 15 days or a maximum of 30 days.
  • The shareholder does not respond to the Company’s notice of issuing shares; then the offer will be deemed to be declined by the shareholders.
  • The notice of shares issue should be sent through registered post or speed post or any electronic mode to the shareholders.

What is the Procedure for the Right Issue of Shares?

The procedure followed for Right issue of Shares is as follows:

Procedure for the Right Issue of Shares

Notice of Board Meeting

As per Section 179(3) of Companies Act, 2013, the notice of the Board Meeting should be sent to the shareholders 7 days before the date of the Board Meeting. The notice should include the agenda of the meeting.

Hold Board Meeting

The Board Meeting is conducted, and Board Resolution is passed. The Resolution is passed as per the Secretarial Standards-1 (SS-1).

The Right Issue does not need the approval of the Shareholders through Special Resolution. The Board can pass a Board Resolution and offer shares to the existing shareholders of Company in proportion to their current shareholding. 

Letter of Offer

After passing of the Board Resolution, the approval of Letter of Offer is also given. The Letter of Offer is sent to all the shareholders by registered post, speed post or through electronic mode. As per Section 62(2) of the Companies Act, 2013, the letter must be posted at least 3 days prior to the opening of the issue.

Subscription Period of Acceptance

The maximum period for acceptance of the letter of offer is 15 days and at most 30 days. The shareholders should accept the offer within this prescribed limit only.

Form MGT-1

After passing of the Board Resolution, Form MGT-1 is filed within 30 days of passing of the Board Resolution. A true certified copy of Board Resolution should be attached with the Form MGT-1. The Form MGT-1 is mandatory to be filed in case of Public Companies.

Accept Application Money

The accepted application should be sent to the Board with the application money. Cash in terms of money is accepted in both private and public Company.

Second Board Meeting

After receiving the application, notice for second Board Meeting should be sent to all the shareholders at least 7 days before the date of the Board Meeting. The notice should include the whole agenda of the Board Meeting.

The required quorum of the Board should be present at the Board Meeting. The Board Resolution for the Allotment of Shares will be passed.

Allotment of Shares

After passing of the Board resolution in the second Board Meeting, the Allotment of Shares is done. The Allotment of Shares should be done within 60 days of receiving the application and application.

Filing of Forms to ROC

After Allotment of Shares, Form PAS-3 should be filed to the Registrar of Companies (ROC) by the Director of Board of Company. The Form PAS-3 should be filed within 30 days from the Allotment of Shares. The certified true copy of Board Resolution and list of Allottees should be attached with Form PAS-3.

Form MGT-14 for both Issues of Shares and Allotment of Shares should be filed with the ROC.

Issue Share Certificate

After filing of the Form PAS-3, the Share Certificate is issued to the shareholders. The Share Certificate should be issued within 2 months from the date of Allotment of Shares. The Share Certificate should be signed by at least 2 Directors of the Company. The Share Certificate shall be issued in Form SH-1.

The Share Stamp should be obtained within 30 days from the date of Issue of Share Certificate.

Conclusion

To fortify equal distribution of Shares in the Company, Right Issue of Shares is done. The Right Issue of Shares is an invitation to the existing shareholders of the Company to purchase new shares at a discounted rate. Before someone decides to choose this method to raise the capital of Company, one should be well versed with the provisions related to it. We at Corpbiz have experienced and skilful professionals to help you with the Procedure of Right Issue of Shares. Our professional will direct you and help you in getting through the procedure.  

Read our article:Issue of Bonus Shares under Companies Act, 2013

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