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Rights Issue of Shares: Features, Working & Procedure Explained

Rights issue of shares is an initial market opportunity for prevailing stakeholders to purchase extra shares of a firm based on pro-rata in a specific timeframe at an offer price than the original market cost.

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rights issue of shares

Overview: Rights Issue Of Shares

If you wish to improve the equity share capital of your firm amongst the several kinds of sources of equity share capital, the rights issue is what you need. Rights shares are different from the general issue of shares. The rights issue of shares is the one where the present stakeholders have the 1st right to subscription of shares.

In general terms, the rights issue offers a right to the already present stakeholders to buy extra new shares in the firm. These are generally filed at a discount when compared to the already existing traded cost in the market. The prevailing stakeholders are permitted to allot a date/time limit in which they will have to operate the right, or else it’ll be relinquished.

 

What is a Rights Issue?

Rights Issue of shares is an initial market opportunity for prevailing stakeholders to purchase extra shares of a firm based on pro-rata in a specific timeframe at an offer price than the original market cost.

It’s necessary to jot down that the rights issue of shares is a mode of chance for prevailing stakeholders to enhance their shareholding. It’s a type of right that is a stakeholder’s choice if he wishes to use it or not. It is not necessary to buy the shares.

Features of a Rights Issue

Here are the primary characteristics of the rights issue:

  • Prevailing shareholders get special privileges with rights shares, which provide them the option to buy shares at a discounted rate on or around a certain date. The shares are being sold at a discount to compensate for the interest reduction that will occur when the extra shares are sold.
  • Existing stakeholders can trade their privileges to other buyers and sellers until the fresh shares are available to buy. The rights are exchanged just like the ordinary equity shares are done.
  • The quantity of rights granted to stakeholders is usually a percentage of their current holding.
  • Current stakeholders can also overlook the rights; nevertheless, this is not recommended because existing shareholdings will be reduced upon the issuance of new shares, resulting in a loss (in value).

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Reasons for a Rights Issue

To obtain additional cash, a corporation sells rights shares. Below are mentioned the most effective reasons for a business to pick the rights issue over others:

  • Reduce the firm’s equity/debt ratio
  • Businesses that are running out of cash and don’t wish to increase their debt load by taking more
  • For the objectives of business growth, takeover, buyouts, and other standard business reasons.

How Rights Issues Work?

Previously, the rights issue had been a lengthy process that took a corporation approximately two months to finish. SEBI recently released new rules in January 2020 to simplify the rights issue procedure and shorten the duration for the fulfillment of rights issues to 31 days by decreasing timelines for several stages and implementing RE dematerialization.

Procedure of Issuing The Rights Issue of Shares

Here are the steps that are involved in the procedure of Rights Issue of shares:

1. Jot down the list of prevailing stakeholders

The firm directors must create a list containing the names of all the existing stakeholders with all the information about the shares they hold. This is needed to confirm the number of rights shares acquired by then.

2. Create necessary paperwork

The firm directors will have to draft and create these documents:

  • Letter of Renunciation
  • Offer Letter for the rights issue
  • Share Application Form

3. Notice for Board Meeting

The board meeting’s notice should be sent out at least a week before the actual BM date. The notice should be drafted in the same manner as given in the Secretarial Standard -1’s clause 1 and section 173 (3).

4. Call a Board Meeting

In BM’s the company directors must discuss and give out resolutions on these:

  • Approval of Share Application Form
  • Acceptance of Letter of Offer
  • To allow Director/ Company Secretary to sign the papers
  • To set a record time
  • Approval of Rights Issue
  • To set the issue cost of the rights shares
  • To decide the amount for the rights issue

5. Prepare Minutes of Meeting

A board meeting is prepared by the Company Secretary and its notice is distributed amongst the directors in 15 days. 

These are the methods through which minutes can be sent:

  • Hand Delivery
  • Courier
  • Registered Post
  • E-mail
  • Speed Post
  • Other forms of known digital means.

6. Issue MGT-14

Once the board resolution is passed, the firm directors are needed to issue the MGT-14 form with the Registrar of Companies (ROC) within a month. But a public firm doesn’t have to file a board resolution when registering for the rights issue.

7. Conduct a Board Meeting

The firm directors are required to conduct a meeting of the board after getting the below-mentioned things:

  • Rejection, Renunciation, or Right acceptance
  • Share application funds

The firm will have to give out a notice related to the board meeting at least seven days before the read date of the meeting.

A board meeting must be held by the company directors in a month from the receipt date of application money to talk about and pass resolutions on these issues:

  1. Shares allotment to the candidates who applied
  2. Approving the share certificate issuance
  3. Permission for incorporating records in the Register of members

8. Share allotment in a month

A firm must allot its shares in a month from the receipt date of share application money. If due for any reason the firm fails to do so, it must refund all the collected amount in 15 days from the date of fulfillment of a month. Nevertheless, if the firm fails to refund the amount, it will have to pay the amount with an interest at a 12% p.a. rate, beginning from the completion of the 60th.

9. Jot down the list of shareholders

A company director has to create a list of stakeholders with the following information:

  • Names of all the stakeholders who have rejected the proposal of the rights issue.
  • Name of the stakeholders who’s limit of bought shares exceeds the entitlement as per the rights issue.
  • Names of all the stakeholders who have relinquished their shares

10. Prepare Allottees list

The firm directors will have to create an allottee list to file it with the Registrar of Companies.

11. File Form PAS-3

The firm directors will have to file a ROA (Return of Allotment) in the PAS-3 form with all the necessary attachments to the ROC (registrar of companies) within a month of shares allotment.

12. Edit the register with important changes

Last but not the least, the firm requires to make necessary entries in the ROM (Register of members) a week after approving the resolution of the board for the share allotment.

Benefits & Drawbacks

It’s a known fact that Rights issue provides numerous advantages to both the stakeholder and the business.

Benefitting the business:

  1. A quick way for a business to generate capital is via rights issue
  2. It’s not much pricey for businesses as it saves funds that would else be spent on advertising or the underwriter’s fee.
  3. Existing stakeholders’ trust is gained by sending a reduced offer to them as a gesture of gratefulness or being the firm’s part.
  4. The organization can generate more cash without increasing its debt burden.

Advantages for the stakeholders:

  1. Prevailing shareholders can expand their ownership in the firm at a lower price than the existing market price through rights offerings.
  2. When prevailing stakeholders register with the rights issue without relinquishing their rights to newcomers, existing stakeholders keep ownership of the firm.

Drawbacks of Rights Issue:

  1. Interests of the prevailing stakeholders would be eliminated as a consequence of the rights issuance.
  2. Several of another factor the organization considers before issuing rights shares is cash requirement. Why?  because of liquidity crunch. This can represent a bad image in front of the investors, showing that a company is floundering, which can ruin the image of the business and stock value.
  3. With the help of rights issues, one can enhance the business’s number of shares, distribute revenue to a huge amount of shares, and reduce EPS, and earnings per share.

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Conclusion

In this article, we learned that a firm files rights shares to its prevailing stakeholders following their shareholdings to enhance the subscribed capital. The firm provides such shares at a lesser price than its price in the market. Using this method, a firm can generate revenue without bearing any additional price. Also, the rights issue is a better option than taking a loan from financial institutions or banks as it doesn’t involve a lot of paperwork or compliance requirements.

Later in the article, you also got to learn about the need for the rights issue of shares, how it works, what’s the procedure to issue, and what are its benefits and drawbacks. We hope that by now you must have grasped the basics of the Rights Issue of Shares. In case of any doubt, reach out to us at ODINT Consulting.

FAQ’s

Yes, you can register online, just like you do for IPO. But it’s possible only if your bank also supports the same.

Right issue and its concepts are governed by the Companies ACT 2013 (Section 62).

All the public, unlisted or private firms can easily file for the rights shares.

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