RIGHT ISSUE PROCEDURE
A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. This type of issue gives existing shareholders securities called rights.
For example, 1:4 rights issue means an existing investor can buy one extra share for every four shares already held by him/her. Usually the price at which the new shares are issued by way of rights issue is less than the prevailing market price of the stock, i.e. the shares are offered at a discount.
There are rights of renounce are also attached with right issue. An existing shareholder can renounce its shares and then company is free to allot or not to any other person who may or may be not be an existing shareholder of company.
As we already know that a company is governed by the Companies Act, 2013, section 62 of the same act governs the right issue aspects.
However, note that a listed company needs to follow procedure and provision of section 62 of the Companies Act, 2013 along with Securities Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2009, as amended from time to time.
Any company can go for right issue be a private company, public, listed or unlisted company.
If one talks about right issue which is governed by section 62 of the Companies Act, 2013 read with rule 13 of The Companies (Share Capital and Debentures) Rules, 2014 the word “shares or other securities” means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date.
The basic idea is to raise fresh capital. A rights issue is not a common practise that a corporate organisation resort to. Ideally, such an issue occurs when a company needs funds for corporate expansion or a large takeover. At the same time, however, companies also use rights issue to prevent themselves from being conked out.
Since a rights issue results in higher equity base for the organisation, it also provides it with better leveraging opportunities.
Right are generally availed by small companies where the power of shareholding retains with the shareholders of company.
The procedure for right issue is as follows:-
Only one (1) forms are filled to the Registrar of Companies (ROC) i.e. PAS-3 that too within thirty (30) days from the Board resolution passed for allotment of shares.
One need to note that, If a company issue Debenture or take loan with the condition to convert such loan and debenture into Shares in future then company has to pass a Special Resolution at the time of accepting of Loan and issue of Debentures, then form MGT-14 for submission of Special Resolution with ROC along with attachment of terms for conversion. Also, no need to follow the procedure of section 62 if the authorised capital is increased through conversion.
If any company and directors fails to adhere with provision of right issue, there is no direct penal provision are given the governed provision however, the general section for Punishment Where No Specific Penalty or Punishment is Provided under the Companies Act, 2013, If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.
Section 42 of the Companies Act, 2013 provides complete procedure and rules for issuing shares on Private Placement basis, provided as under:
A private placement shall be made only to a select group of persons who have been identified by the Board of Directors of the Investee Company. Such number of persons must not exceed fifty at a time and not exceeding two hundred in a financial year and it excludes qualified institutional buyers and employees of the company who are offered securities under ESOP.
The amount of Investment per applicant shall not be less than Rs. 20,000/-. Such Application money shall be deposited from Bank account of the applicant either by cheque or demand draft or other banking channel but not by cash. Such application could not be utilised by the company until it allots the corresponding securities.
Also, the monies received on application shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than for adjustment against allotment of securities; or for the repayment of monies where the company is unable to allot securities.
The company issuing the shares through private placement shall allot its securities within sixty days from the date of receipt of the application money against such securities and if the company is not able to allot the securities within 60 days, it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days. Further, if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of 12% p.a. from the expiry of the sixtieth day.
1. Hold Board Meeting to approve the Notice of Holding General Meeting of Shareholders for the following purposes:
2. Providing Instructions to specified Bank for opening of separate Bank Account and depositing the money against allotment Shares.
3. Confirm whether Letters from all proposed allotees giving consent to subscribe the issue are received or not.
4. Prepare the List of Allotees along with all the required details as per the format prescribed under the Form PAS-5
5. Hold General Meeting and pass special resolution along with resolutions to approve the Offer Letter and authorize an officer of the company to give effect to the Private Placement
6. File Form GNL-2 with MCA along with the PAS-4 and PAS-5 as attachments within 30 days of approval of the offer letter.
7. Hold Board Meeting for Allotment of Securities.
8. File Form PAS-3 and Form MGT-14 within 15 days of the allotment. Attach Special Resolution, Detailed List of allotees and Valuation Report in Form PAS-3.
9. Intimate the Investors about the Outcome of the Board Meeting.
10. Issue corresponding Share Certificates; make respective entries in Register of Members along with confirming the Distinctive numbers and Certificate Numbers of the Shares allotted.
Following is the list of Document required to be prepared for Issuing Equity shares through private placement (on the basis of Procedural Timelines)