Rights Issue of Shares as Per Companies Act 2013

📘 What is a Rights Issue of Shares? Meaning, Purpose, Benefits & Risks

Rights Issue is a way for a company to raise additional capital by offering new shares to its existing shareholders in proportion to their current shareholding. In India, this process is governed by Section 62(1)(a) of the Companies Act, 2013.

When companies need fresh capital to grow or manage debt, one common way to raise funds is by offering a rights issue of shares. In this article, we’ll explore what a rights issue means, how it works, and what it means for shareholders.

🔍 Meaning of Rights Issue

A Rights Issue gives existing shareholders the “right, but not the obligation” to buy additional shares at a discounted price. It helps companies raise funds without diluting the control of current shareholders — as they get first preference.

📌 Example:

If you own 100 shares and the company announces a 1:5 rights issue, you’re eligible to buy 20 more shares (1 for every 5 held).

📚 Legal Provision: Section 62(1)(a), Companies Act 2013

As per Section 62(1)(a):

“Where at any time, a company proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to existing shareholders in proportion to their existing shareholding.”

🧾 Types of Rights Issues

1. Fully Paid Rights Issue: Shareholders pay the entire amount upfront.
2. Partly Paid Rights Issue: Payment is split into multiple calls over time.
3. Renounceable Rights: Shareholders can sell their rights to others.
4. Non-Renounceable Rights: Rights can’t be transferred or sold.

 

💡 Why Companies Offer a Rights Issue

Companies may launch a rights issue for several strategic reasons:

• 🏗️ Funding Expansion Projects
• 📉 Reducing Debt or Improving Cash Flow
• 💼 Meeting Regulatory Capital Requirements
• 🔁 Restructuring or Supporting Subsidiaries

It’s often seen as a less expensive and quicker way to raise funds compared to IPOs or bank loans.

 

🔁 How a Rights Issue Works – Step by Step

Let’s say XYZ Ltd. wants to raise ₹60 crore through a rights issue. Its share face value is ₹10, and it offers shares at ₹20 (₹10 face value + ₹10 premium). The company has 10 crore existing shares.

Steps:

1. Issue Ratio is calculated: New shares = ₹60 crore / ₹20 = 3 crore shares
   Ratio = 3 : 10 → For every 10 shares held, 3 rights shares offered
2. Shareholder gets a rights entitlement (RE): They can subscribe, ignore, or sell their RE if renounceable.
3. Shares are credited post successful subscription.

Rights Issue Ratio Calculator

 

 

✅ Benefits of Rights Issue for Shareholders

• 📉 Buy Shares at a Discounted Price
• 👑 Maintain Shareholding Percentage
• 💸 Increase in Investment Value if Price Rises
• 🆓 Free Rights if Renounceable (can sell rights in the market)

 

⚠️ Risks & Disadvantages

• 📉 Share Dilution: If you don’t participate, your ownership reduces.
• 💸 More Capital Required: You need to invest additional money.
• 📊 Market Perception: Rights issue may be seen as a distress signal.

 

📋 Procedure for Rights Issue under Companies Act, 2013

Here’s a step-by-step procedure applicable for both private and public companies:

1. 🏛️ Board Meeting

• Pass a board resolution to approve the rights issue and send offer letters.

2. ✉️ Issue of Offer Letter (PAS-4)

• The offer must be made through a letter of offer (Form PAS-4).
• Offer must remain open for a minimum of 15 days and a maximum of 30 days.

3. ⚖️ Dispatch of Offer

• Send to all existing shareholders via registered post, speed post, or electronic mode at least 3 days before opening.

4. 🔄 Acceptance, Renunciation, or Rejection

• Shareholders can:
• Accept fully or partially
• Renounce (transfer) their rights
• Decline the offer

5. 🧾 Board Approval of Allotment

• After the offer period, a second board meeting is held to approve allotment.

6. 📝 Filing with ROC

• File Form PAS-3 (Return of Allotment) within 30 days of allotment with the Registrar of Companies (ROC).

🧠 Key Conditions for Rights Issue

Criteria	Requirement
Offer Letter	Must be in Form PAS-4
Offer Period	Minimum 15 days, Maximum 30 days
Mode of Dispatch	Registered/Speed Post or Electronic
ROC Filing	PAS-3 within 30 days of allotment
Private Companies	Can reduce offer period with consent of 90% shareholders in writing or electronic mode

 

🧾 Rights Issue vs Preferential Allotment

Feature	Rights Issue	Preferential Allotment
Offered To	Existing shareholders	Selected investors
Pricing	Usually discounted	As per valuation norms
ROC Forms	PAS-3	PAS-3 + Valuation Report
Approval	Board Resolution	Board + Shareholders (special resolution)

 

How to Apply for Rights Issue in India

1. Check your Email or Demat Account for a rights offer notice.
2. Apply using ASBA through net banking or via the RTA’s website.
3. Use your rights entitlement (RE) number to apply.
4. Ensure application before the closing date (usually 10–15 days).

 

🧠 Conclusion

The Rights Issue process under Companies Act, 2013 ensures that companies raise funds transparently and equitably. It protects existing investors while providing businesses a cost-effective way to increase capital. However, timely compliance with legal provisions and ROC filings is critical to avoid penalties.

A rights issue can be a golden opportunity for existing shareholders to buy more shares at a lower price and support the company's growth. However, one should assess the company’s fundamentals, purpose of the issue, and overall market sentiment before applying.

Participating in a rights issue makes sense only if the company has a solid future outlook and you're confident in its growth story.

❓ FAQ on Rights Issue

🤔 Is rights issue good or bad?

It depends. It’s good if the company is raising funds for growth or expansion. Bad if it signals financial trouble or causes heavy dilution.

📉 Will share price fall after rights issue?

Sometimes yes — because of the increased number of shares and discounted pricing, the stock may adjust downward temporarily.

📊 How is the rights ratio calculated?

Rights Ratio = New Shares Offered / Existing Shares Held E.g., 1:5 means 1 new share for every 5 held.

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