Raising Capital the Smart Way: Right Issue Process for Private Companies in India (Companies Act, 2013)

Looking to raise capital for your private company without diluting existing shareholder control? The right issue might be the perfect solution.

In the dynamic world of business, companies often require additional funds to fuel their growth and expansion. One way for companies to raise capital is through a rights issue, governed by the Companies Act, 2013. Let's delve into the concept, process, and regulations surrounding rights issues.

A right issue, as defined by the Companies Act, 2013, offers existing shareholders the preferential right to buy new shares in proportion to their current holdings. This ensures existing shareholders maintain their voting stake in the company while bringing in fresh capital.

Here's a breakdown of the right issue process for private companies under the Companies Act, 2013:

Board Meeting and Resolution:

1. Notice: Convene a board meeting by sending a notice at least 7 days in advance, specifying the right issue as an agenda item ([Section 173(3) of the Companies Act, 2013]).
2. Resolution: During the meeting, the board must pass a resolution approving the right issue. This resolution will include details like the number of shares offered, issue price, and timelines.

Shareholder Approval: Unlike public companies, private companies are not required to seek approval from shareholders through a special resolution for a rights issue. However, the company's Articles of Association may require such approval.

Offer to Shareholders - The Letter of Offer:

1. Preparation: Draft a Letter of Offer outlining the right issue details, including the issue price, subscription period (minimum 15 days, maximum 30 days, with shorter periods allowed with 90% shareholder consent for private companies), and the right to renounce (the ability to forego subscribing to new shares).
2. Dispatch: Send the Letter of Offer to all existing shareholders through registered post, speed post, or electronic mode at least 3 days before the issue opens.

Subscription and Allotment:

1. Collection: Collect application money from shareholders who choose to subscribe to the new shares.
2. Second Board Meeting: Hold another board meeting to finalize share allotment based on subscriptions received.
3. Form PAS-3: File form PAS-3 with the Registrar of Companies (ROC) within 30 days of allotment, along with the board resolution for allotment and a list of allottees.

Additional Points:

• No Prospectus Needed: Unlike public issuances, right issues in private companies don't require a prospectus.
• Renunciation: Shareholders can renounce their rights partially or completely. Renounced rights can be offered to other existing shareholders or forfeited as per company articles.
• Fractional Rights: In some cases, shareholding proportions might result in fractional rights entitlements. The Companies Act allows ignoring these fractions as long as the overall issuance is proportionate "as nearly as circumstances admit."

Benefits of Rights Issue for Private Companies:

•Enables private companies to raise capital from existing shareholders

•Cost-effective method of raising funds compared to other modes of fundraising

•Helps in maintaining control and ownership within the existing shareholder base

•Enhances shareholder participation and engagement in the company's affairs.

Frequently Asked Questions on Rights Issue

1. What is a Rights Issue?

 A rights issue is a capital raising method where existing shareholders are offered the preferential right at a discounted price to buy new shares in the company, typically in proportion to their current holdings. This allows them to maintain their ownership stake (percentage of voting rights) while bringing in fresh funds for the company.

2.What is the purpose of a rights issue?

The primary purpose of a rights issue is to raise additional capital for the company. It allows companies to tap into their existing shareholder base to raise funds for various purposes such as expansion, debt repayment, or working capital requirements.

3.Who can participate in a Rights Issue?

Only existing shareholders on the record date (a specific date set by the company) are eligible to participate in the rights issue. The number of shares a shareholder can subscribe to is usually proportional to their existing shareholding.

4. What are my options as a shareholder in a Rights Issue?

• Subscribe: You can exercise your rights and purchase new shares at the offer price.

• Renounce: You can choose to forgo subscribing to your allocated rights entirely. These renounced rights can be offered to other existing shareholders or forfeited as per company articles.

• Sell: You can sell your rights to other interested parties in the market (applicable for dematerialized holdings).

5. What happens if I don't respond to the Rights Issue?

If you don't exercise your rights or renounce them by the deadline, your rights will lapse, and you'll lose the opportunity to buy new shares at the preferential offer price.

6. How is the issue price determined?

The company typically sets the issue price for the new shares. It's often lower than the current market price to incentivize existing shareholders to subscribe.

The timeline can vary, but it generally involves:

• Board meeting and resolution approval.
• Dispatching the Letter of Offer to shareholders (minimum 3 days before the issue opens).
• Subscription period (minimum 15 days, maximum 30 days).
• Board meeting for allotment based on subscriptions received.
• Filing necessary forms with the Registrar of Companies.

 8. Do I need to apply in a physical form or electronically?

This depends on how you hold your shares. Demat account holders can often apply electronically, while physical shareholders might need to submit a physical application form.

 

9. Can shareholders renounce their rights in a rights issue?

Yes, shareholders have the option to renounce their rights in favor of another person. This allows shareholders who do not wish to subscribe to the rights issue to sell their rights to someone else.

10.

10. What happens to the renounced rights?

Renounced rights can be offered to other existing shareholders or forfeited as per company articles.

The minimum investment amount will depend on the offer price per share and the number of rights you hold.

Conclusion:

Rights issues are an important tool for companies to raise capital and support their growth and expansion plans. By understanding the process and regulations governing rights issues, companies can effectively utilize this fundraising mechanism to meet their capital requirements.