What is the Right Issue of Shares and Procedure to issue these classes of shares?

Rights issue of shares means the right of giving preference to the company’s existing shareholders to buy additional shares directly from the company in proportionate to their existing holdings. The objective of the Right issue is to raise funds from their existing shareholders and ensure equal distribution of Rights at the same time. The rights offering is an invitation to existing shareholders to increase their exposure to their shareholding in the company at a discount less than the market price on a specified future date.

The time limit for exercising Right of Right Issue Shares

The shareholders who have the right to exercise the offer of Right Issue can apply within 16 to 30 days from the date of issue of the offer. If the offer is not accepted within the said period it shall be deemed to have been refused. In the case of a private limited company, the time limit for acceptance could be even less than 15 days, if 90% of the total members of the company have given their consent by passing a resolution to it either in writing or through electronic mode.

Important Dates in the case of a Rights Issue of Shares

The following dates are to be considered while following the right of right issue

1. Record Date– Record date means the particular date when the investor must own shares in order to be entitled to claim rights relating to shares such as receiving dividends, bonus shares, etc.

2. Issue Opening Date– Issue opening date means a grace period of at least three days to purchase the securities of the company after the issue of the letter of offer.

3. Issue Closure Date– Issue closure Date means the last date after which the Company will not entertain any applications for the exercising of the right for Rights Issue.

4. Rights Entitlement Trading Dates– Rights Entitlements Dates refer to the date on which the shareholders can exercise the option to hold shares in ratio to the number of securities already held by them.

5. Allotment Date– The allotment date refers to the date at which the shares of the company have been allotted in the name of the shareholder.

6. Date of Commencement or listing date– Rights Offering Commencement Date means the date upon which the additional shares are vested in the name of the shareholder and will be considered as the beginning of the subscription election period for the Rights Offering.

Procedure for Right Offering

The procedure for right issue of shares in the company  by following the below steps:

• Hold a Board Meeting to approve the offer of right issue including “the letter of offer”.

• Send an invitation to existing shareholders regarding applying for the right issues at least 3 days before the opening of the issue. The shareholders will have to send his acceptance or renunciation of his rights within the specified time mentioned in the letter of offer which in no case be more than 30 days.

• Hold Board Meeting to make decisions regarding various aspects of allotment of shares.

• File MGT 14 within 30 days of passing of a resolution in case of a public limited company.

• Allot the shares and file PAS- 3 (Return of allotment) within 30 days of allotment of shares.

• Inform depositories (either CDSL or NSDL) about allotment of shares in the case of listed companies if the shares are held in De-materialized forms.

• Issue Share Certificates and record the allotment in the register of shares.

Difference  between Further Issue (FPO) and Right Issue

The company can raise funds from its existing shareholders in two ways i.e. FPO (Further Public Offer) and Right Issue. The differences between the two are:

1. The Right Issue can be exercised by only the existing shareholders of the company while in FPO all types of shareholders irrespective of existing or new shareholders can apply for further issues.

2. A Right Issue is when a listed company gives its existing shareholders the right to buy new shares at a slightly lower price in proportion to the number of shares held by them. Whereas the company has to fix a specified price at which the shareholder has to apply for purchasing of shares through FPO after the issue of IPO.

Difference between Right Offerings, Private Placement, and Preferential Allotment

Conclusion

A Company’s performance depends upon its capacity for raising funds – whether it is for expansion, acquisition, takeovers and debt reduction, etc. Out of all the sources, Right Issue is the most secured and reliable as instead of new shareholders, fresh shares are issued to the existing shareholders at a discounted price. The right issue involves lesser compliances as it is more of an internal matter in the company. Also, the existing Shareholders have an option to maintain their original owners in the company as they can buy additional shares in proportion to their existing shareholding.