Overview of Rights Issue-New Rule 12A

Any operating business needs funds for expansion as well as smooth running of the business. Now the business can choose to opt for borrowed funds or own funds. In case of companies own funds means equity or preference share capital. Now, again the company can choose to bring in new shareholders or can issue shares to existing shareholders. In this article our scope of discussion will be where a company makes a choice to issue shares to its existing shareholders which is called Rights Issue.

Meaning of Rights Issue

In simple terms Rights Issue means where the shares are issued to the existing shareholders of the Company. The reason that Right Issue is preferred by the company is that there are less formalities and money can be raised quite fast. As far as the shareholders are concerned, they prefer it as their rights will not get diluted as new people are not stepping in and they are getting more shares at a comparatively less price.

The legal definition of Rights Issue says that when a company intends to increase its “subscribed share capital” by further issue of shares then the shares will be offered to the “existing holders of equity shares” in proportion to the “paid-up share capital” on those shares y by sending a letter with an offer to avail such offer “within specified time”. Now, next we will understand the law and see how Rule12 A has affected Rights Issue.

Understanding the legal provisions

To understand what lawmakers, imply with the terms relating to share capital, let us see the following chart

From this we can imply that rights issue means issuing shares to existing members/ shareholders and it need not be fully paid.

Now other relevant points related to rights issue are-

• Preference shares cannot be shared as right shares.
• The letter of offer for rights issue will be deemed to contain Right to claim/deny or renounce such rights, if anything to the contrary is not there in Articles of Association of the Company.
• If the increase in subscribed share capital is because of convertible debentures/ preference shares that were issued at an earlier date than the provisions of this section will not be applicable.
• Once the time specified in the letter of offer is lapsed and there is no communication from shareholder, the offer will deem to be denied and company can dispose of such shares at their own will. Now, this is the part which is impacted by Rule-12A. We will discuss the same in detail as we move ahead.

What is New Rule-12A for Rights Issue?

Now, Ministry of Corporate Affairs (MCA) has issued a notification dated 11.02.2021, whereby they have introduced Rule 12A. As per above discussion the shareholder should claim or deny the offer of Right Shares with in specified time, failing which the offer will deemed to be declined.

In this notification the minimum period that can be mentioned in the letter of offer to claim such offer has been reduced to 7 days from the existing limit of 15 days. As per earlier provisions the issue needed to be kept open for a minimum of 15 days. The maximum limit of 30 days is still the same. That is now the offer can be kept open for 7days-30days.

Impact of New Rule-12A on Rights Issue

The companies are supposed to dispatch the letter for issue of right shares through registered post or speed post or through email to all existing shareholders at least 3 days before the opening of the issue. So, once the letter is reached and offer is opened the offer will remain open only for number of days specified in letter of offer. This period can vary from 7 days to 30 days. If the company gives a 7 days’ time than consequences will be-

• For companies it has brought more liquidity to funds that the company needs to generate through this issue. Company can access that money in a lesser time as the allotment and other procedures for closure can be started just after a week and company can use the funds raised to fulfil its requirement.
• The companies where the size of issue is small or shareholder base is small, it will be beneficial for them as they need not wait for 15days to get everyone’s response.
• If it is looked at with the point of view of shareholders than it can be said that they will get less time to weigh and analyze the offer and have to reply just within a week

Procedure to issue Rights Share in brief

The procedure to be followed for Right Shares is-

• Company has to prepare a draft offer letter and decide a cut-off date for the offer to be accepted/declined.
• The Board Meeting should be called with at least a prior notice of 7 days. The notice should contain agenda points for the proposed meeting.
• The Board meeting should be conducted as per schedule and the resolution will be passed at the meeting to issue right shares. The approved letter of offer will be dispatched by the authorized director by means of a registered post or speed post or through electric mode to all shareholders.
• The letter of offer should contain number of shares offered and a time limit of minimum 7 days and maximum 30 days to exercise the option.
• Now, the offer will open at least 3 days after issue of offer letter. And the issue can remain open for 7 days to 30 days, as per amendment by Rule-12A on Rights Issue.
• Form MGT-14 should be filed with Registrar within 30 days of passing Board Resolution.
• The application money shall be received from the shareholders.
• Then again board meeting should be called with a 7 days prior notice with agenda points.
• The list of allotees will be presented to the board and resolution should be passed within 60 days of receiving the money.
• File PAS-3 and MGT-14 with Registrar of Companies along with the list of allotees and Board Resolution.
• The share certificates should be issued to shareholders in Form SH-1 within 2 months of allotment of shares under the signature of authorized directors.

Conclusion

The Rights Issue as discussed in the above write-up is a comparatively better option both for companies and shareholders. On one hand it helps the company to raise funds in a less time and on the other hand shareholders are able to keep their ownership and voting rights intact as the issue is in proportion to their existing shareholding. Rule 12A has changed the minimum time for which a right issue can be kept open, this has further made it a win-win situation for the companies as companies can now choose a period between 7-30 days to issue right shares to their shareholders.