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).
Reasons for a Rights Issue
Whenever a firm decides to grow in the market, it can need more funds for a variety of causes such as to settle debts, buy new equipments and so on. In order to reduce the chances of paying any interests, firms could choose equity instead of debt. When issuing equity a quick and simple approach for capital growth is through rights offerings. Similar to this, businesses would generally issue rights to raise money for projects when debt financing is impractical, unsuitable, or costly.
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 loans
- 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 the 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
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
A board meeting must be held by the company directors in a month from the receipt date of the application money to talk about and pass resolutions on these issues:
- Shares allotment to the candidates who applied
- Approving the share certificate issuance
- Permission for incorporating records in the Register of members
- 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 the 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
- Registered Post
- 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 to 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. 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.
8. Prepare Allottees list
The firm directors will have to create an allottee list to file it with the Registrar of Companies.
9. 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.
10. 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 the Rights issue provides numerous advantages to both the stakeholder and the business.
Benefitting the business through rights issue of shares:
- A quick way for a business to generate capital is via rights issue
- It’s not much pricey for businesses as it saves funds that would else be spent on advertising or the underwriter’s fee.
- Existing stakeholders’ trust is gained by sending a reduced offer to them as a gesture of gratefulness or being the firm’s part.
- The organization can generate more cash without increasing its debt burden.
Advantages for the stakeholders via a rights issue of shares:
- Prevailing shareholders can expand their ownership in the firm at a lower price than the existing market price through rights offerings.
- 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:
- Interests of the prevailing stakeholders would be eliminated as a consequence of the rights issuance.
- Any reputable firm’s rights issue might occasionally be seen unfavourably. 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.
- 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.
- Businesses with a successful product and a modest development pace might not attract sufficient investors to justify a subscription.
Right Issues vs Private Placement
- Target investors: Right issues are targeted at existing shareholders, while private placements are targeted at institutional investors or accredited investors.
- Regulatory requirements: Right issues are subject to more regulatory scrutiny than private placements.
- Speed: Right securities can be a faster way to raise capital than private placements.
- Cost: Private placements can be more expensive than rights issues.
- Marketability: Private placements can be more difficult to market than rights issues.
Rights issue of shares is the possibility that businesses give its current stockholders to purchase additional stock in the business directly from them at a discounted rate. These stockholders benefit from increasing exposure to the stock market by receiving rights issues at a rate below the market value. Businesses choose the alternative of issuing rights when they are out of money or want to grow and broaden their businesses. The primary motive of right issuing is that the business may obtain more capital at more affordable rates and without the weight of excessive debt, both of which can contribute to the long-term improvement of the business’s financial standing.
This article has briefly discuss the rights issue of shares, including their characteristics, justifications, benefits, and advantages. Speak with our specialists at Odint Consulting if you have any questions about the proper issuance of shares.
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.
- The main advantage of the rights issue is receiving more high-quality equities for less money.
- By investing in additional capital, stockholders may keep the business under their ownership without having to worry about having their shares diluted.
- The rights stocks are being issued to meet the firm’s financing necessities. The goal of the rights issue is not achieved if these stocks aren’t completely or at least sufficiently subscribed to cover the necessary funds.
- Any well-known firm’s rights issue may occasionally be viewed unfavourably. Investors may believe that the corporation’s economic resources are constrained, thus the reason it has resorted to a issuing of rights.
Shareholders can sell their entitlements for shares to other investors through the stock exchange’s entitlement trading platform or through an off-market deal. They can sell all or part of their entitlements, as they choose.