After reading this article you will learn about:- 1. Meaning of Right Issue 2. Guidelines Issued By SEBI for Right Issues 3. Advantages.
Meaning of Right Issue:
Rights issue is an invitation to the existing shareholders to subscribe for further shares to be issued by a company. A right simply means an option to buy certain securities at a certain privileged price within a certain specified period.
A limited company having a share capital may, if so authorised by the articles of association of the company, increase its share capital by issuing new shares. The Company Act, 1956 lays down the manner in which further issue of shares, whether equity or preference, is to be made so as to ensure equitable distribution of shares without disturbing the established equilibrium of shareholding in the company.
According to Section 81 of the Companies Act, whenever a public limited company proposes to increase its subscribed capital by the allotment of further shares, after the expiry of two years from the formation of the company or the expiry of one year from the first allotment of shares in the company, whichever is earlier, the following conditions or procedure must be followed:
(1) Such shares must be offered to holders of equity shares in proportion, as nearly as circumstances admit, to the capital paid-up on those share.
(2) The offer must be made by giving a notice specifying the number of shares offered.
(3) The offer must be made to accept the shares within a period specified in the notice being not than 15 days.
(4) Unless the articles of association of the company provide otherwise, the notice must also state that the shareholder has the right to renounce all or any of the shares offered to him in favour of his nominees.
Shares so offered to existing shareholders are called Right Shares as the existing equity shareholders of the a public company have a first right of allotment of further shares. The offer of such shares to the existing equity shareholder is known as Privileged Subscription or Right Issue. The prior right of the shareholders is also known as pre-emtive right.
After expiry of the time specified in the notice or on receipt of earlier information from the shareholder declining to accept the shares offered, the Board of Directors may dispose them off in such a manner as they think most beneficial to the company.
However, there are two exceptions to the general rule of pre-emptive right as laid down in Section 81 and in the following cases further shares may be-offered to the outsiders irrespective of the existing shareholders:
(1) If a special resolution is passed by the company in general meeting to allot further shares in a different manner than provided, i.e., to allot shares to any person without giving any preference to the existing shareholders.
(2) If an ordinary resolution to that effect is passed and the approval of the Central Government is obtained on the ground that such a proposal is most beneficial to company.
However, it may be noted that the above mentioned provisions of section 81 do not apply to:
(i) A private company,
(ii) The proposal to increase the authorised capital of the company, and
(iii) The increase of subscribed capital of a public company caused by the exercise of an option attached to debentures issued or loans raised by the company provided the terms of such issue are approved by both:
(a) Special resolution of the company, and
(b) The Central Government, but the approval of the Central Government is not required if the terms conform to the following rules:
(1) The debentures or loans may be issued or raised through private subscription or through the issue of a prospectus to the public.
(2) A public financial institution either underwrites or sanctions or subscribes to the whole or part of the issuing of debentures or raising of loans.
(3) The company has received the consent of the Central Government under the provisions of Capital Issues Control Act, 1947 (now SEBI) for the terms of conversion of debentures and loans into equity capital.
Guidelines Issued By SEBI for Right Issues:
A company can make offer of rights issues after meeting the requirements as laid down by the Securities and Exchange Board of India. The SEBI has issued various guidelines for the issues of rights shares.
Henceforth, all listed companies desirous of making rights issues shall invariable issue an advertisement prominently in not less than 2 all India newspapers about the despatch of letters of offer together with composite application forms by registered post giving the date of despatch of letter of offers, date of opening and closing of subscription lists etc.
Such advertisement should be issued at least one week before the date of opening of the subscription list. Where the shareholders have neither received the original composite form nor are they in a position to obtain the duplicate forms, they may be given the additional facility to subscribe to the rights on plain paper.
As per the original guidelines of SEBI, rights issues should not be kept open for more than 60 day. Henceforth, no preferential allotment may be made along with any rights issue.
Advantages of Rights Issue:
Issue of further shares to the existing shareholders offers the followings advantages:
1. It ensures equitable distribution of shares without disturbing the established equilibrium of shareholders and the control of the company is preserved in the hands of the existing shareholders.
2. The expenses to be incurred, otherwise if shares are offered to the public, are avoided
3. There is more certainty of the shares being sold to the existing shareholders.
4. It betters the image of the company and stimulates enthusiastic response from shareholders and the investment market.
5. It ensures that the directors do not misuse the opportunity of issuing new shares to their relatives and friends at lower prices on the one hand and on the other get more controlling rights in the company.