Share capital is the principal method by which a company raises funds for a very long term without any burden of repayment or returns.
For an existing company there are two ways primarily they can raise funds without going to new share holders, that means without diluting the powers of existing shareholders.
Right issues
Bonus issues
Bonus issue of shares can be used by a company which have retained earnings which they want to capitalise. In this method there will not be any fresh inflow of funds to the company, but the company can capitalise and use various reserves account, and such other amounts which can be utilised.
In right issue the company will be making fresh issue of shares to the existing shareholders in proportion to the their existing share holding. The main attraction of this method of issue of shares it guarantees
It provides inflow of funds to the organisation
It does not change the shareholding pattern or their powers.
Section 62(1)(a) of Companies Act, 2013 talks about Right Issue
“Section 62(1)(a) deals with issue of Further shares shall be offered to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:—
(i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;
(ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right;
(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company;”
Right issue of shares is the method which can be used by small companies to increase their share capital but also can retain the shareholding with shareholders of the company. As per the provisions of the Companies Act, this is another right given to the shares holders, where the existing share holders will be given priority while the company goes for subsequent of issue of shares.
Right issue is available to any type of company including listed, unlisted and private companies. This enable the existing shareholders to acquire the shares of the company , when they go for a subsequent issue at a discount to the market price.
Following provisions of the laws are applicable for making a right issue.
Section 46 along with Rule 5 of Companies (Share capital and Debentures) Rules 2014 - with respect to certificate of shares.
With regard to allotment of securities section39 (4) and Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules 2014 will be applied.
Section 62 of Companies Act and rules under Companies ( share Capital and Debentures) Rules 2014 will guide the issue of right shares.
Resolutions and agreements to be filed as per section 117(3) and 179(3)(c) and Companies (Management and Administration) Rules 2014.
After the issue of share in relation to Register of Members Section 88 and Rule 3 and 5 of Companies (Management and Administration) Rules 2014 will apply.
Before going for right issue of shares following points should be considered.
The notice of the right issue should contain the power of renouncement to the share holder, unless the articles of association of the company should provide otherwise.
Proportion of right should be clearly mentioned and should not be arbitrary.
The issue should be kept open for at least 15 days and not more than 30 days.
The notice of right issue should mention the time within which the offer is not accepted and after that the offer deemed to be denied.
If the share holder declined the offer directly or indirectly, the notice also should have provision for the Board of Directors to dispose of the shares in any manner which is not detrimental to the interests of the company and its shareholders.
Process to be followed by a CS
Step 1
Prepare draft of the offer letter for issue of shares on right basis along with the share application form and the letter of renunciation to be attached to the offer letter.
Step 2
Prepare the list of existing shareholders along with details of shares, and ascertain the number of shares which can be received by them on the right issue basis.
Step 3
The Board meeting is to be held by sending at least seven days advance notice to all the Directors of the company.
Step 4
Conduct a Board meeting for passing a resolution
to approve offer letter to issue shares on right basis
to fix the record date, the price of equity shares, ratio for right issue
to issue shares on right basis to existing shareholders
Step 5
File Form MGT-14 with ROC within 30 days of Board meeting, in case of public limited companies (Not applicable to private limited companies vide Notification no. GSR 464 (E) dated 05.06.2015)
Step 6
The notice of offer (there is no prescribed format) needs to be dispatched through registered or speed post or through electronic mode to all the existing shareholders at least 3 days before the opening of the issue.
The letter of offer shall specify the number of shares offered and offer shall be open for a minimum period of 15 days to maximum period of 30 days. {The period of 3 days and 15 to 30 days may be shorter if 90 % shareholders have given their consent for shorter notice period in case of private limited company}.
Step 7
Make arrangement for receipt of share Application of Mone
Step 8
After the closure of offer, prepare the list of shareholders with:
Ascertaining the list of shareholders who have renounced their shares
Ascertaining the list of shareholders who have not subscribed for within the time prescribed for as per the offer letter or have denied the offer
Ascertaining the list of shareholders who have subscribed for shares in excess of their right to subscribe for the shares
Step 9
The allotment of shares shall be made
Step 10
Conduct a board meeting within 60 days from the date of receipt of the application money (if the company fails to allot securities, has to repay the application money to the subscribers within 15 days from the date of completion of 60 days and in case the company fails to repay the application money within the aforesaid period, the company is liable to repay application money along with interest at the rate of 12% p.a. from the expiry of the 60th day.) as the allotment of the shares is to be made within such period; for
Approving the proportion in which the shares renounce and/or denied
Allotment of shares
Giving authority to issue the share certificates to the allottees within time prescribed under the act
Giving authority to make necessary entries in the register of members
Step 11
Issue share certificates (SH-1) in accordance with the provisions of section 46 read with Rule 5 of Companies (Share Capital and Debentures) Rules, 2014
Step 12
File e-Form PAS-3 along with attachments with the Registrar of Companies within 30 days of allotment of shares
Step 13
Make necessary entries in the register of members (Form MGT-1) within seven days after passing of board resolution for allotment of shares. (Section 88 & 5 of Companies (Management and administration) Rules, 2014)
With regard to penal provisions in respect of right issue, the companies act is silent. But section 450 of Companies Act says that where there is no specific penal provision is provided in the act, the company and every officer in default of the company or such other person shall be punishable with a fine unto Rs 10000 and further fine unto Rs 1000/- for every day after the first day during which contravention continues.