Rights Issue: A Guide for Companies and Investors

A rights issue is a way for a company to raise additional capital by offering its existing shareholders the right to purchase new shares in proportion to their current holdings. It is a common method used by companies to fund expansion, repay debt, or strengthen their balance sheet.

Key Features of a Rights Issue

1. Proportional Allocation: Shares are offered to existing shareholders based on their current holdings.
2. Discounted Price: New shares are usually offered at a price lower than the market rate to encourage subscription.
3. Tradable Rights: Shareholders may sell or renounce their rights to other investors if they do not wish to subscribe.
4. Time-bound Offer: Companies provide a limited window (usually 15–30 days) for shareholders to exercise their rights.

Process of a Rights Issue

Step 1: Board Approval

• The Board of Directors must approve the proposal for a rights issue.
• The approval typically covers:
• Number of shares to be issued
• Issue price (may include a discount to market price)
• Record date (date to identify shareholders eligible for rights)
• Purpose of the issue (e.g., expansion, debt repayment, working capital)

Step 2: Shareholders' Approval (if required)

• If the rights issue increases authorized share capital or involves a preferential allotment, a Special Resolution at a General Meeting may be required.
• Shareholders vote on:
• Approval of new share issuance
• Amendment of Memorandum of Association (if authorized capital increases)

Step 3: Drafting and Filing Offer Letter / Prospectus

• The company prepares an offer document containing all details of the rights issue. This includes:
• Number of shares being offered
• Rights issue ratio (e.g., 1:3, meaning 1 new share for every 3 existing shares)
• Issue price and any premium
• Record date
• Procedure for acceptance or renunciation of rights
• Purpose of funds raised

Step 4: Record Date

• The record date is the date on which the company identifies shareholders eligible to receive rights.
• Only those holding shares on the record date can exercise the rights to subscribe.

Step 5: Subscription Period

• Shareholders have a fixed period (usually minimum15–maximum30 days-in case 90% of the members in case pf private company provide their consent, lesser period can be considered) to:
1. Accept the rights and subscribe to new shares
2. Renounce the rights by selling them to other investors
3. Ignore the offer (may lead to dilution of ownership)
• Payment for subscribed shares is made through bank transfer, cheque, or online channels.

After the expiry of subscription period, the Board can issue the unaccepted shares to outside shareholders too.

Step 6: Allotment of Shares

• After the subscription period closes:
• The company verifies payments
• Allotment letters are issued to shareholders
• Shares are credited to shareholders’ accounts (demat or physical)
• In case of oversubscription, shares may be allotted on a pro-rata basis to comply with the rights ratio.

Step 7: Reporting and Compliance

• The company must file returns of allotment with the Registrar of Companies (ROC).
• Any excess funds received (from oversubscription) may be refunded.

Step 8: Trading of Rights (Optional)

• Shareholders may sell their rights to others if they do not wish to subscribe.

Step 9: Utilization of Funds

• The funds raised from the rights issue are used as specified in the offer letter:
• Business expansion
• Debt repayment
• Working capital
• Acquisition or other strategic purposes
• Companies must report proper utilization in their financial statements.