Right Issue of Shares: Step-by-Step Procedure

A Right Issue of shares is an excellent opportunity for existing investors to increase their stake in the company. This article examines the step-by-step procedure for a successful and efficient Right Issue of shares.

Right Issue of Shares 

The right issue of shares is a common practice in the corporate world. A right issue of shares allows existing shareholders to purchase additional shares at a pre-determined price within a specified time frame. It is done to raise additional capital for the company. In India, the procedure for the right issue of shares is governed by the Companies Act 2013. 

Preparatory Steps

Before initiating the fitting issue of shares, specific preliminary steps need to be taken:

• Board Meeting and Approval: The company’s board of directors must convene a meeting to discuss and approve the proposal for the right issue of shares. The board should evaluate the company’s financial position, determine the number of shares to be issued, and fix the issue price.
• Consent of Shareholders: The consent of existing shareholders is essential before commencing the right issue process of shares. A notice must be sent to all shareholders informing them about the proposed right issue and seeking their approval.
• Appointment of Lead Manager: The company must appoint a lead manager to handle the right issue process. The lead manager is responsible for preparing the offer document, coordinating with regulatory authorities, and ensuring compliance with all legal requirements.

Filing with Regulatory Authorities

Once the preliminary steps are completed, the company needs to file certain documents with the relevant regulatory authorities:

• Draft Offer Letter: The company, with the assistance of the lead manager, must prepare a draft letter of offer. This document contains all the necessary details about the right issue, such as the number of shares to be issued, issue price, terms and conditions, and timeline for subscription.
• Approval from Stock Exchange(s): The draft offer letter and other required documents must be submitted to the stock exchange(s) where the company’s shares are listed. The stock exchange(s) will review the records and approve the right issue.
• Filing with Registrar of Companies (ROC): The company must file the draft letter of offer and other relevant documents with the ROC in the prescribed format. This filing is essential to obtain the ROC’s approval for conducting the right issue.

Right Issue of Shares and Allotment 

After obtaining the necessary approvals, the company can proceed with the allotment or rights issue of shares:

• Dispatch of Offer Letter: The company must dispatch the offer letter to all eligible shareholders. The letter must contain detailed information about the right issue, including the number of shares, issue price, and the timeline for subscription.
• Opening and Closing of Subscription Period: The subscription period for the right issue must be specified in the offer letter. Shareholders are given a specific timeline within which they can exercise their rights by subscribing to additional shares.
• Acceptance and Allotment of Shares: Shareholders who wish to subscribe to the right issue of shares must submit their application forms and payment for the shares. The company should record the applications received and allot the shares within the prescribed time frame.

Reporting and Compliance

After the completion of the right issue process, the company needs to fulfill certain reporting and compliance requirements:

• Submission of Post-Issue Report: The lead manager must prepare a post-issue report detailing the number of shares subscribed and the amount received. This report and other required documents must be submitted to the stock exchange(s) and the ROC.
• Filing of Allotment: The company must file a return of allotment with the ROC within 30 days from the date of issuance. The return should contain complete details of the shareholders to whom the shares have been allotted.
• Compliance with Other Applicable Regulations: The company must ensure compliance with other applicable regulations, such as the Securities and Exchange Board of India (SEBI) guidelines and the listing agreement with the stock exchange(s).

Right Issue of Shares: Step-by-Step Procedure in Nut Shell

Note: Listing new shares on the stock exchange requires the company to comply with the applicable regulations of the Securities and Exchange Board of India (SEBI) and the stock exchange on which the company is listed.

The Examples of Right Issue of Shares

Here are a few examples of companies that issued the right shares recently:

• Hindustan Petroleum Corporation Limited (BSE: HPCL) – On 13th August, the company announced the issue of rights shares in the ratio of 3:25, which means that for every 25 equity shares held, an investor would be eligible to subscribe for three rights shares.
• Oil and Natural Gas Corporation Limited (BSE: ONGC) – On 21st August, the company announced the issue of rights shares in the ratio of 1:2, which means that for every two equity shares held, an investor would be eligible to subscribe for one rights share.
• Coal India Limited (BSE: COALIND) – On 8th September, the company announced the issue of rights shares in the ratio of 1:7, which means that for every seven equity shares held, an investor would be eligible to subscribe for one rights share.

These are a few companies that issued the right shares recently. The ratio in which the shares are issued may vary depending on the company and the terms of the offering.

What are the Advantages and Disadvantages of the Right issue of shares? 

Advantages of a right issue of shares:

• Provides existing shareholders with an opportunity to increase their stake in the company at a discounted price.
• Increases the liquidity of the company’s shares as additional shares become available on the market.
• Allows the company to raise additional capital without paying additional taxes or fees.
• It offers a way for the company to reward existing shareholders.
• May increase the share price if the offering is successful.

Disadvantages of a right issue of shares:

• It may lead to a dilution of existing shareholders’ holdings.
• It may result in a decrease in the share price if the offering is unsuccessful.
• Requires additional paperwork and administrative costs for the company and investors.
• It May result in more ownership being transferred from existing shareholders to new shareholders in the case of an oversubscribed right issue.
• It may require the company to provide additional financial information to investors, exposing them to further scrutiny and potential criticism.

Winding Up Note

Conducting the right issue of shares in India involves a step-by-step procedure encompassing various regulatory and compliance aspects. From obtaining board approval to obtaining necessary approvals from regulatory authorities and dispatching the letter of offer to allotment of shares, each stage requires meticulous planning and adherence to legal requirements. By following the correct procedure and seeking professional assistance, companies can successfully carry out a proper issue and raise the required funds for their growth and expansion.