Right Issue of Shares Under Companies Act 2013: Process & Rules

Introduction

Companies can raise fresh equity from their existing shareholders through a Right Issue of Shares. Section 62(1)(a) of the Companies Act, 2013 governs this method and generally gives existing equity shareholders a proportionate opportunity to subscribe to further shares.

A rights issue helps shareholders maintain their ownership percentage while allowing the company to raise additional funds. This article explains the Right Issue of Shares under Companies Act 2013, including its process, timelines, forms and compliance requirements.

What is Right Issue of Shares Under Companies Act 2013?

A Right Issue of Shares is an offer by a company to its existing equity shareholders to subscribe to additional shares in proportion to their existing paid-up shareholding.

Under Section 62(1)(a) of the Companies Act, 2013, when a company proposes to increase its subscribed share capital by issuing further shares, it must first offer those shares to its existing equity shareholders, subject to the applicable provisions.

Key features of a rights issue include:

• The company offers shares to existing equity shareholders on a proportionate basis.
• Existing shareholders receive the first opportunity to subscribe to additional shares.
• The issue gives shareholders an opportunity to maintain their ownership percentage.
• The company can raise additional equity capital without making a public offer.
• Private and public companies can undertake a rights issue subject to applicable legal requirements.

Listed companies must also comply with applicable SEBI laws and regulations in addition to the Companies Act, 2013.

Section 62 of Companies Act 2013 for Right Issue of Shares

Section 62(1)(a) of the Companies Act, 2013 governs the further issue of share capital through a rights issue.

The main requirements include:

• The company must offer new shares to existing equity shareholders in proportion, as nearly as circumstances permit, to the paid-up share capital on their existing shares.
• The company must make the offer through a notice specifying the number of shares offered.
• The offer must generally remain open for at least 7 days and not more than 30 days.
• Unless the Articles of Association provide otherwise, shareholders have the right to renounce all or part of their entitlement in favour of another person.
• The offer notice should clearly mention the shareholder’s right of renunciation.
• After the offer period expires, or after receiving an earlier refusal from a shareholder, the Board may dispose of the declined shares in a manner that is not disadvantageous to the shareholders and the company.

Rule 12A of the Companies (Share Capital and Debentures) Rules, 2014 prescribes a minimum acceptance period of seven days. A private company may use an offer period shorter than the otherwise applicable minimum period, and may also shorten the three-day dispatch period, where at least 90% of its members give consent in writing or through electronic mode, subject to the applicable MCA exemption notification.

Procedure for Right Issue of Shares

1. Conduct Board Meeting and Approve the Issue

The Board should approve the Right Issue of Shares, including the number of shares, issue price, rights ratio, offer period and letter of offer. A separate shareholders’ resolution is generally not required unless another action, such as increasing authorised share capital, requires member approval.

2. Issue the Letter of Offer

The company should send the offer to eligible equity shareholders stating the number of shares, issue price, rights ratio, payment terms, offer period and renunciation rights.

The offer should generally remain open for at least 7 days and not more than 30 days. The company should dispatch the offer notice to existing shareholders at least three days before the opening of the issue through registered post, speed post, electronic mode, courier or another mode having proof of delivery, subject to applicable exemptions.

3. File Form MGT-14, Where Applicable

For a public company, the Board Resolution approving the issue of securities should generally be filed with the ROC in Form MGT-14 within 30 days under Sections 117 and 179 of the Companies Act, 2013.

Private companies generally do not need to file MGT-14 for Board Resolutions passed under Section 179(3), provided they have not defaulted in filing financial statements under Section 137 or annual returns under Section 92, as required under the applicable MCA exemption notification.

4. Receive Subscription Money

Shareholders accepting the offer should submit their applications with the required amount. The company should maintain records of subscriptions, payments, renunciations and declined offers.

5. Allot the Shares

After the offer period, the Board should approve the allotment of shares. The Board may also dispose of unsubscribed shares in a manner that is not disadvantageous to the company or its shareholders, as permitted under Section 62(1)(a)(iii).

6. File Form PAS-3

The company should file Form PAS-3 with the Registrar of Companies within 30 days from the date of allotment, along with the prescribed allotment details and applicable documents.

7. Issue Share Certificates or Credit Demat Shares

Where physical certificates are permitted, the company should issue share certificates in Form SH-1 within two months from allotment. For dematerialised securities, the company should complete the required depository-related compliances.

8. Update Statutory Records

The company should update its statutory registers, shareholding details, paid-up share capital and relevant Board records after completing the allotment.

Dematerialisation Requirements for Right Issue of Shares

Companies should check whether the dematerialisation provisions apply before starting the Rights Issue Process. Private companies covered by Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014 must comply with the applicable dematerialisation requirements.

For a private company, other than a Producer Company, that was not a small company as on 31 March 2023, the extended Rule 9B compliance deadline of 30 June 2025 has already passed. Private companies that become subject to Rule 9B based on a later financial year should determine their compliance date under the applicable 18-month timeline prescribed in Rule 9B(2).

Where Rule 9B applies, the company must issue securities in dematerialised form. Before making a rights offer, it must also ensure compliance with the prescribed dematerialisation requirements relating to the securities held by its promoters, directors and key managerial personnel.

A security holder subscribing through a rights offer must ensure that all securities already held in the company are in dematerialised form before such subscription, where Rule 9B applies. Unlisted public companies must separately check the dematerialisation requirements applicable under Rule 9A.

Forms and Documents Relevant to Right Issue of Shares

Penalty for Non-Compliance With Rights Issue Provisions

Non-compliance with a rights issue may attract different penalties depending on the nature of the default.

For example, where a company fails to file the return of allotment as required under Section 39(4), Section 39(5) provides a penalty of ₹1,000 for each day during which the default continues, subject to a maximum of ₹1 lakh, for the company and the officer in default.

Where the Companies Act, 2013 or the applicable rules do not provide a specific penalty for a particular contravention, Section 450 may apply. Under Section 450:

• The penalty is ₹10,000.
• A continuing contravention may attract an additional ₹1,000 for each day after the first day.
• The maximum penalty is ₹2 lakh for the company.
• The maximum penalty is ₹50,000 for an officer in default or any other person.

Companies should therefore identify the specific provision that has been violated before determining the applicable penalty.

Assistance With Right Issue of Shares Compliance

Ebizfiling assists companies undertaking a Right Issue of Shares with documentation and corporate compliance requirements under the Companies Act, 2013.

Ebizfiling can assist with:

• Reviewing the proposed rights issue and applicable compliance requirements
• Preparing the letter of offer, Board Resolutions and allotment documents
• Checking applicable ROC filings, including Form MGT-14 and Form PAS-3
• Assisting with share capital updates and statutory records under Section 62

Companies can also use Ebizfiling’s Business Advisory and Management Consulting Services for compliance planning and support in corporate decision-making related to the rights issue.

Conclusion

A Right Issue of Shares allows a company to raise additional capital while giving existing equity shareholders an opportunity to maintain their ownership interest.

Section 62(1)(a) of the Companies Act, 2013 sets out the main legal framework for making the offer.

Companies should carefully follow the offer period, dispatch requirements, allotment procedure, PAS-3 filing and applicable dematerialisation requirements. Proper documentation throughout the Rights Issue Process can help the company complete the transaction in compliance with applicable law.

Frequently Asked Questions