Do you wish to issue right shares for Existing Shareholders for Further Issue of Share Capital in Startups ?

Section 62 of the Companies Act, 2013 governs the process of issuing right shares, which involves allotting shares to existing shareholders in proportion to their current holdings. This article provides a detailed overview of the key considerations and procedures involved in issuing right shares, including entitlement ratios, offer letter requirements, time limits, and compliance with deposit rules. Did you know that Increase of Authorised Share Capital is must if you wish to issue further shares where paid-up capital is increasing than your present authorised capital.
The shareholders can also apply for additional shares. The shareholders have also right to renounce their rights in favour of another person whether a member or not. Shareholders renouncing their rights cannot apply for additional shares. There is no time limit within which shares must be allotted. However, under the Companies (Acceptance of Deposits) Rules, 2014 share application monies are to be allotted shares within 60 days, failing which the share application money, if not refunded within 15 days becomes a deposit after 75 days (60+15). This will involve compliance of deposit rules, also requires that the offer letter should be posted or Issued at least 3 days prior to the opening date.

The Right Issue offer must remain valid for a minimum period of 15 days and maximum of 30 days from the date of issue.

The unsubscribed portion of the right issue can be allotted to any other person at the discretion of the board. However, in such a case a special resolution must be passed and in case of allotment for consideration other than cash, the Valuation report has to be obtained.

Key Features of Right Issue Process-

1. Determining Entitlement Ratios:

Calculate the entitlement ratio by dividing the proposed issue of share capital as of a specific date by the paid-up share capital as of the relevant date. This ratio will be used to determine the number of right shares each shareholder is entitled to.

2. Preparation of the Offer Letter:

Create an offer letter to be sent to existing shareholders. The offer letter should clearly state the opening and closing dates during which shareholders can exercise their rights to subscribe to the right shares, either in full or in part. Shareholders should also be informed that they have the option to apply for additional shares. Moreover, shareholders have the right to renounce their rights in favor of another person, regardless of whether that person is a member of the company. It is important to note that shareholders who renounce their rights are not eligible to apply for additional shares.

3. Compliance with Time Limits:

While there is no specific time limit for the allotment of right shares, it is crucial to adhere to the Companies (Acceptance of Deposits) Rules, 2014. According to these rules, share application monies must be allotted shares within 60 days. Failure to allot shares within this timeframe and not refunded within 15 days may result in the share application money becoming a deposit after 75 days, triggering compliance with deposit rules (Section 73-Prohibition on acceptance of deposits from public).

4. Dispatch of Offer Letter:

To comply with Section 62, the offer letter must be posted to shareholders at least three days prior to the opening date. The offer remains valid for a minimum period of 15 days and a maximum period of 30 days from the date of issue.

5. Delivery of Offer Letter:

Offer letters can be delivered by registered post or courier. If delivered by courier, proper receipt must be obtained to ensure proof of delivery. Alternatively, delivery by hand is acceptable as long as a proper receipt is obtained.

6. Allotment of Unsubscribed Shares:

If there is an unsubscribed portion of the right issue, the board has the discretion to allot these shares to any other person, requires passing a special resolution. In case of allotment for consideration other than cash, a valuer report must be obtained.
 
Issuing right shares requires careful attention to the provisions outlined in Section 62 of the Companies Act, 2013. By calculating entitlement ratios, preparing offer letters, complying with time limits, and ensuring proper delivery, companies can successfully execute a right issue and meet the regulatory requirements. Adherence to these guidelines will help companies navigate the process effectively and safeguard the interests of shareholders and the company as a whole.

Step-wise Process of Further Issue of Share Capital-

Sr. No

Activity or Process

1.      

Check Articles on further issue of shares.

2.      

Check whether the proposed issue is within the Authorised Share Capital, if not, then increase the same suitably.

3.      

Calculate the offer ratio as under:

Paid up share capital as on 01.04.2023                          = X

Proposed issue of share capital as on 01.04.2023:       = Y

Ratio: Y divided by X

This will be mentioned in your offer letter discussed below.

4.      

Premium will be calculated as under – (based on last audited balance sheet available say 31.03.2023)

Share capital = A

Reserves & Surplus = B

Less revaluation reserve, if any = C

No. of equity shares paid up = N

Premium: (A+B-C)/N – face value of share

5.      

Hold a board meeting and decide on issue of shares on right basis.

6.      

Issue offer letter of rights accompanied by

a.     Share Application Form by the share holder

b.     Share Application Form by the Renouncee as per specimen attached.

7.      

Collect share application money with share application forms from Investors

8.      

Hold a Board Meeting for the allotment of shares to the applicants.

9.      

File Form MGT14 on MCA portal (See section 179(3)(c) to take on record the further issue of shares.(Not Required in case of Private Company)

File Form PAS-3 on MCA portal see Section 39(4) for allotment of shares within 30 days from the Allotment date.

Issuing right shares in compliance with Section 62 of the Companies Act, 2013 is a significant process that requires careful consideration and adherence to regulatory requirements. By accurately calculating entitlement ratios, preparing comprehensive offer letters, complying with time limits, and ensuring proper delivery, companies can successfully carry out a right issue. It is essential to prioritize the interests of shareholders and maintain compliance with the relevant laws and regulations throughout the process. By following the guidelines outlined in this article, companies can navigate the complexities of issuing right shares and foster transparency, fairness, and legality in their operations.

Learn more about the Issue of Paid-up Capital of Shares for your company.