29 Feb A Guide to Conducting Right Issues for Share Capital Expansion
In the realm of corporate finance, the issuance of additional shares through a right issue serves as a strategic tool for companies to augment their subscribed share capital. Unlike public offerings, right issues target existing shareholders, providing them the opportunity to purchase new shares in proportion to their current holdings. This method, governed by Section 62 of the Companies Act, 2013, plays a pivotal role in bolstering a company’s financial standing, particularly during times of need.
Understanding Right Issue:
A right issue entails the issuance of shares to existing shareholders at a discounted rate, aimed at augmenting the company’s capital base. This mechanism, facilitated under the Companies Act, 2013, empowers companies to garner funds efficiently, bypassing the complexities associated with traditional borrowing methods.
Objectives of Right Issue:
- Augmenting subscribed capital.
- Offering shares to existing shareholders in line with their current holdings.
- Issuing a formal letter of offer to shareholders.
- Setting a timeframe for shareholders to respond to the offer.
- Deeming unresponsive shareholders as declining the offer.
Rationale Behind Right Issue:
Beyond capital augmentation, right issues confer several advantages such as facilitating fund raising, converting unsubscribed capital, and promoting expansion without incurring debt.
Conditions for Right Issue:
- Conversion of securities into dematerialized form.
- Verification of authorized capital adequacy.
- Ensuring Articles of Association provision for right issue.
Eligibility for Right Issue:
- Existing Shareholders: Receive offer letters specifying terms.
- Employees: Through ESOP schemes.
- Other Parties: Via Special Resolutions.
Procedure for Right Issue:
- Issue notice for Board meeting.
- Convene Board meeting and pass resolution.
- Issue letter of offer to shareholders.
- File MGT-14 within 30 days.
- Receive application money.
- Convene second Board meeting for allotment resolution.
- File Form PAS-3 within 30 days of allotment.
- Issue share certificates.
Conclusion:
In essence, right issues serve as a strategic avenue for companies to bolster their capital base while extending equitable opportunities to existing shareholders. This method, structured under the legal framework of the Companies Act, 2013, stands as a testament to corporate financial prudence and strategic foresight.
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