Checklist for Issuance of Right Shares as per Companies Act - Jordensky

This article contains a checklist for a private corporation or an unlisted public company issuing shares on a rights basis under Act

Checklist for Issuance of Right Shares as per Companies Act - Jordensky

Introduction

When a company need new funding while maintaining the proportionate balance of the existing shareholders' voting rights, it issues Rights shares. The reason the issue is referred to as such is because it allows current owners the first opportunity to purchase additional shares at a price below market value. The rights issue is an opportunity for current shareholders to increase their holdings by purchasing additional shares in proportion

Section 62 of the Companies Act of 2013 ("the Act") deals with the "additional issuing of share capital." According to the aforementioned provisions, the shares may be offered to:

  • Existing Shareholders on a proportionate basis,
  • Employees under an ESOP Program,
  • Any other person, 
  • Conversion of debentures or loans into shares

This article contains a checklist for a Private Limited Company or an Unlisted Public Company issuing shares on a rights basis under Section 62 of the Companies Act. A listed business must also follow the Act and the SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2018.

Detailed Checklist as per Companies Act for Issuance of Right Shares

Except for Nidhi Companies, the provisions of Section 62 of the Act apply to all companies.

1) Recipients of Rights Offers

According to the provisions, if a company proposes to increase its subscribed capital at any time by is suing additional shares (i.e. equity shares, preference shares), such shares shall be offered to the company's existing shareholders who are equity shareholders on the date of the offer, and such offer is in proportion (i.e. pro rata basis) to the company's paid-up share capital, as nearly as the circumstances allow.

2) Cut-off date

In order to make an offer of shares under Section 62 of the Act, the board of directors must determine the cut-off date for identifying the list of shareholders and their holdings.

3) Approval Procedure

In the case of a rights issue, the board of directors must approve it. The board of directors shall discuss the following items about the approval procedure at its meeting:

  1. Need for requirement of funds,
  2. Need for offering shares to existing shareholders of the company,
  3. Cut-off date,
  4. Offer Price,
  5. Approving and signing offer letter,
  6. Appointing intermediaries, if required,
  7. Authorizing an officer or director for signing agreements with intermediaries,
  8. Authorizing officer or director for issuing offer letter to existing shareholders of the company,
  9. Authorizing officers or directors to take necessary action in relation to rights issue. As offer is made to all shareholders, approval of shareholders is not required.

4) Issuance of Offer letter

There is no particular provision in the Act or the Rules that specifies the detailed contents of the offer letter for a rights issue. However, the board is responsible for making essential disclosures to shareholders. The contents of a rights issue offer letter may be identical to those of a private placement of securities offer letter, with a special reference to proportionate offer, right of renunciation, and offer term.

5) Offer price

There is no particular provision in the Act or the Rules for calculating the price of shares to be issued under the rights issue. The board of directors may determine the share price or acquire a valuation certificate under the Income Tax Act of 1961 or the Foreign Exchange Management Act of 1999, as applicable. If the valuation certificate is obtained, the board of directors shall take notice of it at its meeting and make the relevant reference in the offer letter

6) Offer Period

The offer shall be made by notice indicating the number of shares offered and restricting the time to not less than 15 days and not more than 30 days from the date of the offer, after which the offer shall be assumed to have been declined if not accepted. Furthermore, in the case of an IFSC public company or a private business, shorter durations (i.e.15 days/30 days) shall apply if 90% of the members have expressed their permission in writing or electronically. The shareholder notification must be delivered to all existing shareholders within three days by registered mail, speed post, electronic mail, courier, or any other method with proof of delivery.

7) Renunciation right

Unless the company's articles of organization state otherwise, the rights offer is presumed to include a right exercisable by the person concerned to renounce the shares given to him or any of them in favor of any other person. This right of renunciation must be stated in the notice/offer letter.

8) Completion of the Offer Period

When the time specified in the notice expires, or the board of directors receives earlier notice 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 a manner that is not detrimental to the shareholders and the company. Such shares are issued but unsubscribed, and the board of directors may distribute them to a few promoters, directors, or anybody else. The goal is to ensure that the company's finance requirements are met.

9) Allotment of Equity Shares

Following receipt of share application money, the board of directors shall pass a resolution authorizing the allotment of shares and, if applicable, the repayment of share application money. The board must also give directors the authority to complete post-allotment compliances. In the event of unlisted public firms, the shareholders' demat account will be credited with the required number of authorized shares.

10) Post-allotment Compliances

Following the allotment of shares, the company must file a return of allotment in e-Form PAS-3 with the Registrar within 30 days, together with the amount prescribed in the Companies(Registration of Offices and Fees) Rules, 2014. The corporation must provide share certificates within two months of allotment. Following the allotment of shares, the company secretary or any other person authorized by the board of directors shall make the required entries in the register of members within 7days of the date of allotment.

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