Right Issue Under Companies Act, 2013

A Right Issue in an unlisted private company, governed by Section 62 of the Companies Act, 2013, offers existing shareholders the opportunity to purchase additional shares at a predetermined price, in proportion to their existing holdings. This method of capital-raising provides companies with a means to garner funds for expansion, while also maintaining equity among existing stakeholders.

Benefits of raising capital under right issue

1. Equitable Opportunity: Right Issues ensure fairness by offering existing shareholders/Promoters the first opportunity to subscribe to new shares, thereby preventing dilution of their ownership.
2. Capital Infusion: Companies can raise additional capital for various purposes such as expansion, debt repayment, or investment in new ventures.
3. Enhanced Shareholder Value: Successful Right Issues can bolster investor confidence and positively impact the company's valuation.
4. Cost-Effective Financing: Compared to other methods of fundraising, Right Issues can be a cost-effective option with fewer regulatory hurdles.
5. Existing Members: Raising of the Capital from Existing Members without admitting to a new Members to the company.
6. Increase in Subscribed Capital of the Company: The ultimate result of the right issue in case subscription is the increase of subscribed capital of the company.

Process of raising capital under right issue

1. Board Meeting: The company's board must pass a resolution approving the Right Issue and determining the terms and conditions, including the issue price and the ratio of shares to be offered and record date along with other important events.
2. Offer Letter: Shareholders must be notified through an offer letter specifying the terms of the Right Issue, including the number of shares they are entitled to subscribe and pay the subscription price within the offer period.
3. OfferPeriod: A specific period is provided during which shareholders can exercise their rights to subscribe to the additional shares and offer Acceptance/ Offer Rejection/ Offer Renunciation shall be communicated during this period only.
4. Allotment of Shares: After the offer period ends or other communications received by the company, the company allots shares to the subscribing shareholders based on their entitlement. Allotment of securities must be done within 60 days of receipt of Application along with application money.
5. Filing with Registrar: The company must file PAS-3 (Return of Allotment) Within 30 days of Allotment with the Registrar of Companies (ROC) as per the Companies Act, 2013 and relevant rules.

List of Documents Required for raising capital under right issue :

1. Board Resolution approving the Right Issue.
2. Offer letter to shareholders.
3. Shareholder list indicating entitlement to the Right Issue.
4. Allotment to subscribing shareholders in a duly conduct Board Meeting.
5. Forms and filings as prescribed (PAS-3) by the ROC within 30 days of allotment.

Frequently asked questions (FAQs)

1. What is a Right Issue?

- A Right Issue is an offer of additional shares made by a company to its existing shareholders, usually at a discounted price, in proportion to their current holdings.

2. Who is eligible to participate in a Right Issue?

- Existing shareholders of the company on the record date are eligible to participate in a Right Issue.

3. What is the purpose of a Right Issue?

- The primary purpose of a Right Issue is to raise additional capital for the company's operations, expansion, or other strategic initiatives.

4. How is the price of shares determined in a Right Issue?

- The price of shares in a Right Issue is determined by the company's board of directors, usually based on factors such as market conditions, valuation, and regulatory requirements.

5. What happens if a shareholder does not exercise their rights in a Right Issue?

- If a shareholder does not exercise their rights in a Right Issue, their portion of the additional shares may be allotted to other shareholders or investors.

6. Can non-shareholders participate in a Right Issue?

- In most cases, only existing shareholders are eligible to participate in a Right Issue. However, companies may sometimes allow non-shareholders to participate under certain conditions.

7. What is the timeline for a Right Issue?

- The timeline for a Right Issue typically includes announcement, record date, offer period, allotment, and listing of additional shares, as per regulatory requirements and company policies.

8. How are rights offered to shareholders in a Right Issue?

- Shareholders are usually notified through offer letters or notices, specifying the number of rights they are entitled to and the terms of the Right Issue.

9. What is the difference between a Right Issue and a Bonus Issue?

- A Right Issue involves issuing additional shares to existing shareholders at a predetermined price, whereas a Bonus Issue involves issuing free additional shares to existing shareholders based on their current holdings.

10. Can a Right Issue be renounced or transferred to another person?

- Yes, shareholders may renounce or transfer their rights to subscribe to additional shares in a Right Issue to another person, subject to company policies and regulatory approvals.

11. What are the regulatory requirements for conducting a Right Issue?

- Companies must comply with the provisions of the Companies Act, 2013, and relevant regulations issued by regulatory authorities such as the Securities and Exchange Board of India (SEBI).

12. How are securities allotted in a Right Issue?

- Securities are allotted to shareholders who have exercised their rights in proportion to their existing holdings, subject to availability and oversubscription.

13. What are the consequences of oversubscription in a Right Issue?

- In case of oversubscription, the allotment of additional shares may be made on a pro-rata basis or through a lottery system, as determined by the company's board.

14. Are there any tax implications of participating in a Right Issue?

- Shareholders should consult with tax advisors regarding any tax implications of participating in a Right Issue, including potential capital gains or losses.

15. What are the rights of minority shareholders in a Right Issue?

- Minority shareholders have the same rights as majority shareholders to participate in a Right Issue and receive additional shares in proportion to their existing holdings.

16. Is valuation required in case of the right issue?

- As per the Provisions of the companies act, 2013 there are no clear indication on the valuation requirement in case of the Right Issue. However, It is advisable to take valuation report in to arrive at Fair Market Value of securities to be Issued.

17. What securities/ shares are covered in right issue?

-According to section 62 of the Companies Act, 2013 read with rule 13 of The Companies (Share Capital and Debentures) Rules, 2014 “shares or other securities” means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date.

18. What are the taxability of Right Issue?

Rights Shares issued to shareholders do not attract any incidence of taxation. However, at the time of sale by shareholders, such sale of shares attracts capital gain tax.

Capital Gain Tax

When the shareholder actually sells the shares. The incidence of sale will attract capital gains tax. The gains can be either long term or short term, depending on the period for which the employee has held the shares. In case of unlisted equity shares, period of holding is 24 months. Short term capital assets – when sold within 24 months of holding them and long term capital assets – when sold after 24 months of holding them. Short term capital gains (STCG) are taxed at income tax slab rates applicable to individuals. Long-term capital gains (LTCG) are taxed after applying the indexation to the original cost of purchase. Indexed gains so calculated shall be taxed at a flat rate of 20% plus applicable surcharge and education cess.

20. Is Share Certificates are to be issued under Right Issue?

Company shall issue share certificate in Form SH-01 Within 60 days from the date of allotment