A rights issue is the default route when a company wants fresh capital from the people who already own it. It protects existing shareholders against dilution, and it needs fewer formalities than a private placement. The rules still trip companies up on timing and documentation.
The legal framework
- Section 62(1)(a): when a company with share capital proposes to increase its subscribed capital by issuing further shares, it must offer them to existing equity shareholders in proportion to their holdings.
- Rule 12, Companies (Share Capital and Debentures) Rules, 2014: notice of the offer must be dispatched by registered post, speed post or electronic mode at least three days before the issue opens.
- No prospectus: a rights issue doesn’t need one, even where renunciation is allowed.
- Who gets the offer: only equity shareholders. Preference shareholders have no right to it.
The offer notice
The notice must state the number of shares offered. It must give shareholders an acceptance window of not less than 15 days and not more than 30 days from the date of the offer, after which the offer is deemed declined. Two relaxations apply:
- Private companies can shorten the window below 15 days if members holding at least 90% consent in writing or electronically.
- A 7-day minimum has been reported as notified in February 2021. Confirm which version applies to your company type.
Renunciation
The offer is deemed to include a right to renounce the shares in favour of another person unless the articles provide otherwise, and the notice must say so. This makes it possible to bring in a new investor through a shareholder’s renunciation. Where the articles bar renunciation, an amendment by special resolution is the route.
Step-by-step
| Step | What happens |
|---|---|
| 1 | Check authorised capital. If insufficient, increase it (ordinary resolution, SH-7 and MGT-14 as applicable) |
| 2 | Board resolution approving the issue, ratio, price and offer period |
| 3 | Send the notice or letter of offer at least 3 days before opening |
| 4 | Offer stays open for the permitted period |
| 5 | Accept, renounce or decline: the shareholder’s choice |
| 6 | Board allots; unsubscribed shares can be disposed of in a manner not disadvantageous to the members and the company |
| 7 | File PAS-3 within 30 days of allotment; issue share certificates within 2 months |
Points that matter
- Price: the Companies Act does not require a valuation for a rights issue, but the price should be defensible, especially where shares go to a renouncee at a different price from the offer.
- Demat: unlisted public companies, and under the extended Rule 9B, private companies other than small companies, must issue securities in dematerialised form. Check ISIN and depository steps before allotment.
- Stamp duty applies on issue of shares.
- MGT-14: public companies file it for the board resolution. For private companies, commentary is divided, so verify.
- FEMA: if non-residents hold shares or a renunciation goes to a non-resident, the FEMA pricing, sectoral cap and FC-GPR reporting rules apply (see article 3).
Common mistakes
- Counting the offer period from dispatch rather than from the date of the offer.
- Forgetting the 3-day pre-opening notice.
- Leaving the renunciation statement out of the notice.
- Allotting to an outsider without checking the articles.
- Missing the 30-day PAS-3 deadline.
Checklist: confirm capital, fix the ratio and price, pass the board resolution, serve the notice, wait out the window, allot, file PAS-3, issue certificates and update registers.
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