Article on Concept & Process of Right Issue Sept 2023
1. Background
The provisions under the Companies Act, 1956 under Section 81 (1) was that when a company after two years of its incorporation or one year after the first allotment made after its incorporation, proposes to increase its subscribed capital by allotment of further shares, it shall offer the same to the existing shareholders of the company in proportion to the paid-up capital of the company.
Further, as per the provisions of Section 81(1A) of the Companies Act, 1956, if the company proposes to offer further shares to any person (whether an existing shareholder or not) it is required to either (a) obtain the approval of its members vide a special resolution or (b) obtain the approval of its members vide ordinary resolution and the Central Government is satisfied that the proposal was most beneficial to the company.
Unfortunately, the provisions of Section 81 (1A) was exempted for the private limited company, due to which there were a number of litigations of Oppression and Mismanagement (u/s 397 &398) when the shareholdings of the existing members of a private limited company were diluted by people in the management of the company by allotment of shares to themselves with the sole purpose of gaining control over the company.
To rule out such misuse of the provisions, the Companies Act, 2013 does not distinguish between private or public company when it proposes to increase its subscribed capital by the issue of further shares. It is mandated under section 62 of the Companies Act, 2013 that if the further issue of shares is not the Right Issue offer to every existing shareholder, then the approval by way of special resolution (with 3/4th Majority) is required.
2. Purpose of raising funds
The question comes what is the need of raising of funds by issue of shares. The answer is that the company need to issue shares for various purposes, like
- Working capital
- New Project or Venture or entering New Market
- Launch of new products
- Diversification
- Debt Financing (Paying off existing debt)
- Acquisition of Capital Assets.
- Expansion of Business (Scaling the existing business)
3. Concept and Step Plan for Right Issue under Section 62(1)(a) & 62(2) of The Companies Act, 2013 read with The Companies (Share Capital & Debentures) Rules, 2014
Right issue means an offer of additional securities by the company to its existing shareholders, in proportion to their existing shareholding in the company. The right issue enables the company to maintain a balance of voting rights and control. A Company may offer such additional securities on the right basis to its existing shareholders by following the step plan as follows;
a) Check the Articles of Association of the company for the following:
- To ensure that Authorised Share Capital is sufficient for the issue of shares.
- If it provides for the renunciation of the shares.
b) No need of Valuation Report if the securities are offered equally to all existing shareholders (Resident or Non-Resident). However, it shall be required if IND AS is applicable to the Company.
c) Hold the 1stBoard Meeting to approve:
- the Offer of shares on a Right Basis.
- Authorisation for execution of the requisite acts, deed and things thereto.
d) Dispatch of Letter of Offer (LOO) with Notice to all existing shareholders at least **3 days before the opening of the issue by Registered Post/Speed Post/ Electronic mode/*Courier or any other mode having proof of delivery.
*The Companies Amendment Act, 2017 allowed Courier or any other mode having proof of delivery.
**Private company is allowed to dispatch LOO for a period shorter than 3 days, if 90% members consent to it in writing or electronic mode
e) ***File e-Form MGT 14 with the office of the Registrar of Companies (RoC) within 30 days of passing of the Board Resolution u/s 179(3)
***A private company is exempted from filing MGT 14 for resolution passed u/s 179(3)
f) Receive subscription amount from the subscribers in the normal bank account of the Company. There is no need to open a separate Bank Account with a Scheduled Bank which is required for Private Placement or Preferential Allotment
g) Hold the 2ndBoard meeting and approve the Allotment of shares with authority to issue the shares. (Physical or Demat)
h) Allotment of shares need to be made within 60 days from the date of receipt of share application money. If it is not so allotted, such application money need to be refunded within next 15 days, and if not refunded, it shall be treated as a Public Deposits.
i) File e-Form PAS 3 (Return of Allotment) with RoC within 30 days from the date of the Allotment.
j) Issue the share certificate within 2 months from the Date of Allotment if in physical form. If shares are to be issued in Demat Form, file Corporate Action Form (CAF) with the Depositories.
k) Make necessary entries in the Register of Members, if the same is in physical form. However, when Shares are in Demat form, as per Section 11 of The Depositories Act, 1996, every depository shall maintain a register and an index of beneficial owners.
l) If the shares are issued on a repatriable Basis to Non-Residents, provisions of Foreign Exchange Management Act, 1999 (FEMA), particularly Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 need to be complied with.
m) For Non-Banking Financial Companies (NBFC) / Housing Finance Companies (HFC) separate rules to be complied with as applicable.
4. Penalty provisions under the Companies Act, 2013.
Provisions for the issue of further shares on a Right basis are provided under sections 62(1)(a) & 62(2) of the Companies Act, 2013 (“the Act”) read with Rule 12A of the Companies (Share Capital and Debentures) Rules, 2014.
There is no specific penalty provided for non-compliance or contravention of section 62. Hence, in case of a Right issue, the penal provisions as provided under section 450 of the Act shall be applicable.
As per section 450 of the act, the company/any officer of the company /any other person who contravenes the provisions of the act and no specific penalty or punishment is provided for the contravention therewith, shall be liable to a penalty of Rs.10,000/- (Fixed Amount). And in case of continuing contravention, a further penalty of Rs.1000 for each day during which it continues will be levied. A maximum cap of Penalty is Rs.2 Lakh to the Company and Rs.50,000/- to Officer or any other person.
Lesser Penalties for certain type of companies.
Section 446B of the act provides that in case of Non-compliance by:
- OPC / Small Company/ Start-up company/ Producer Company,
- Any of its Officer-in-Default or any other person in respect of such company,
Penalty _= ½ of the penalty specified in respective provisions of the Act,
Upper cap- Rs. 2 lakhs for company.
Rs. 1 lakh for the officer in default/any other
5. Comparative chart for right issue in Public Company and Private company.
| Sr. no | Public Company | Private company |
|---|---|---|
| a | Dispatch of Letter of Offer with notice shall be made at least 3 days before the opening of issue and the Offer period shall be open for Min 15 days. | A period shorter than 3 days for dispatch of Letter of Offer with notice is allowed and the Offer period can be open for less than 15 days if 90% of members of the company give their consent in writing or electronic mode for it. However, the offer period shall be open for a minimum of 7 days. (Refer to Rule 12A of the Companies (Share Capital and Debentures) Rules, 2014. |
| b | Shares shall be in Demat form only. | Shares can be in Physical or Demat form |
| c | It is mandatory to file the Board Resolution passed u/s 179(3)for issue of securities | An exemption has been provided from the filing of resolutions passed u/s 179(3) for issue of securities |
6. Important points on the Right issue.
- It is an Offer to the existing shareholders of the Company.
- Offer to be in proportion to their existing shareholding.
- If the Offer is not accepted with in the time prescribed, it shall be deemed declined.
- Right to renounce the shares deemed available unless Articles of Association provide otherwise.
- A statement with respect to renunciation shall be specified in the Letter of Offer.
- The Board has the right to dispose of the unsubscribed portion of the Offer which is not disadvantageous to the shareholders and the Company.
- Where the investor is an entity of a *countries sharing a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any country sharing a land border with India, it can invest only under the Government approval route. Hence, A Statement with respect to it shall be made in the Letter of Offer.
7. Why offered to existing shareholders?
- Existing shareholders understand and are aware of the business of the company.
- The company wants to maintain its ownership in the hands of existing owners and have a balance of voting rights and control.
- It enables existing shareholders to maintain their proportional ownership in the company, as the shares offered on the right basis are offered in proportion to the existing holdings.
- Trust is built up among the shareholders.
8. Frequently asked questions (FAQs)
The Company can issue only Compulsorily Convertible Debentures u/s 62.
Yes, the Company can use the funds before filing the Return of Allotment.
A Valuation Report is not required if the securities are offered equally to all existing shareholders (Resident or Non-Resident). However, it shall be required if IND AS is applicable to the Company.
Yes, a shareholder can apply for more shares, however the decision for allotment of the same rests with the Company.
There is no time frame prescribed for the same.
Author- Meet Bellara (CS Trainee)
Edited – Amita Desai
Date: 28 September 2023
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