Rights Issue of Shares is a method by which a company raises additional capital by offering existing shareholders the right to purchase new shares in proportion to their current holdings, typically at a discounted price. Governed under Section 62 of the Companies Act, 2013, a rights issue helps companies raise funds without diluting ownership significantly, while giving current shareholders the opportunity to maintain their shareholding percentage. It is a common route for companies to fund expansion, repay debts, or meet working capital requirements.
WHAT IS RIGHTS ISSUE OF SHARES?
A Rights Issue of Shares is a method by which a company raises additional capital by offering new shares to its existing shareholders in proportion to their existing shareholding. This issue is governed under Section 62 of the Companies Act, 2013 and is typically offered at a discounted price to incentivize participation. It allows companies to raise funds without approaching the public or external investors, helping maintain control within existing ownership.
FEATURES OF RIGHTS ISSUE:
- Proportional Offer: Shares are offered to existing shareholders in a fixed ratio based on their current holdings.
- Discounted Price: Shares are often offered at a price lower than the market value.
- Renounceable or Non-renounceable: Shareholders may have the option to transfer (renounce) their rights to another person.
- No SEBI Approval Required (for Private Companies): Listed companies need to comply with SEBI (LODR) Regulations, while private companies follow internal board/shareholder approvals.
REQUIREMENTS:
- Board Approval: Approval from Board of Directors for the rights issue.
- Offer Letter: Offer letter (Form PAS-4) to be sent to all shareholders.
- ROC Filing: Filing of MGT-14 with the Registrar of Companies (for public companies).
- Separate Bank Account: Opening of a separate bank account to receive share application money.
- Open Period: Issue must remain open for at least 15 days and not more than 30 days.
ADVANTAGES OF RIGHTS ISSUE:
- Cost-Effective Fundraising: Lower compliance and procedural costs compared to public issues.
- Maintains Ownership: Existing shareholders retain their control and shareholding percentage.
- Quick Capital Infusion: Faster and simpler process for raising funds internally.
- Shareholder Value Protection: Allows shareholders to prevent dilution by purchasing additional shares.
ENTITIES THAT CAN USE RIGHTS ISSUE:
- Private Limited Companies
- Public Limited Companies
- Listed Companies (subject to SEBI regulations)
FREQUENTLY ASKED QUESTIONS
Q1: Who can participate in a rights issue?
A1: Only existing shareholders as of the record date can participate in a rights issue.
Q2: Is rights issue mandatory for existing shareholders?
A2: No, shareholders can choose to accept, reject, or renounce the rights.
Q3: Can the rights be traded?
A3: Yes, in the case of listed companies with renounceable rights, shareholders can trade their rights entitlements.
Q4: Is shareholder approval required for rights issue?
A4: In some cases, especially in public companies, shareholder approval via special resolution is required.
Q5: Is it necessary to file with ROC?
A5: Yes, filings such as Form MGT-14 and PAS-3 (return of allotment) must be submitted with the ROC.
Q6: Is valuation report required for rights issue?
A6: Not mandatory for private companies unless the issue is to outsiders or for compliance reasons.
Q7: Can rights issue be done in physical form?
A7: Yes, especially in the case of unlisted or private companies, rights issues may be done offline.
Q8: How long does the process take?
A8: The process can take 2–4 weeks depending on the company’s preparedness and shareholder response.