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Overview of Rights Issue of Shares
A Rights Issue is a method of raising capital in which a company offers additional shares to its existing shareholders in proportion to their current shareholding. Through this process, shareholders receive the opportunity to subscribe to new shares before they are offered to other investors.
Companies generally issue right shares at a price lower than the prevailing market value of their shares, making it an attractive investment opportunity for existing shareholders. This fundraising method enables companies to increase their subscribed capital without incurring significant additional costs.
Compared to traditional borrowing methods such as bank loans or financial assistance from financial institutions, a Rights Issue of Shares can be a more convenient option due to comparatively fewer documentation requirements and compliance procedures.
The process of issuing right shares is governed by Section 62 of the Companies Act, 2013, which provides existing shareholders with a pre-emptive right to subscribe to additional shares before they are offered to other parties.
A Rights Issue serves as a formal offer from the company to its existing shareholders, allowing them to purchase additional securities and participate in the company’s capital expansion plans.
Benefits of Rights Issue of Shares
A Rights Issue is an effective method of raising additional capital by offering shares to existing shareholders. It provides companies with a flexible fundraising option while helping them achieve their financial and business objectives. The major benefits of a Rights Issue of Shares in India include:
Business Expansion and Growth
Companies often opt for a Rights Issue when they plan to increase their share capital, expand business operations, or invest in new projects. It allows businesses to raise funds without creating additional interest payment obligations associated with loans or debt financing.
Suitable Funding Option When Debt is Not Feasible
In situations where loan financing is unavailable, expensive, or not suitable for the company’s financial structure, a Rights Issue provides an alternative source of capital. It helps businesses meet their funding requirements without increasing their debt burden.
Improvement in Debt-Equity Ratio
A company may choose a Rights Issue to strengthen its financial structure by improving its debt-equity ratio. It can also be beneficial when a company plans strategic activities such as acquiring another business or increasing its investment capacity.
Strengthening Financial Position
Companies can use funds raised through a Rights Issue of Shares to repay existing debts and improve their overall financial stability. Reducing debt obligations helps enhance financial health and creates a stronger foundation for future growth.
Key Features of Rights Issue of Shares
A Rights Issue is a significant method of raising capital by offering additional shares to existing shareholders. It provides companies with a structured way to increase share capital while allowing current shareholders to maintain their ownership interest.
The major features of a Rights Issue in India include:
Increase in Subscribed and Paid-up Capital
A company may issue right shares to increase its subscribed capital or paid-up share capital and strengthen its financial resources.
Cost-Effective Fund Raising Method
When a company requires additional funds due to financial requirements, it may choose a Rights Issue without incurring underwriting expenses, making it a cost-efficient capital-raising option.
Preference to Existing Shareholders
A Rights Issue provides priority rights to existing shareholders, allowing them to purchase additional shares before they are offered to other investors.
Shares Offered in Proportion to Existing Holdings
Companies issue right shares to shareholders according to their existing shareholding ratio, ensuring fair participation opportunities.
Right to Transfer or Renounce Shares
Existing shareholders have the option to transfer or renounce their Rights Issue entitlement in favour of other eligible investors as per applicable regulations.
Option to Reject the Offer
Shareholders are not obligated to subscribe to the additional shares offered under a Rights Issue. However, if they choose not to participate, their ownership percentage may reduce after completion of the issue.
Conditions for Rights Issue Process
Before initiating a Rights Issue of Shares, a company must fulfill certain legal and regulatory requirements, including:
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An unlisted company offering a Rights Issue must ensure that its securities are held in dematerialized (DEMAT) form as required under the Depositories Act, 1996. This applies to securities held by Key Managerial Personnel (KMP), Directors, and Promoters.
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Shareholders who wish to subscribe to the offered right shares must also hold their securities in dematerialized form.
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The company must verify whether its authorized share capital is sufficient for issuing right shares. If additional capital is required, the company must amend the capital clause of its Memorandum of Association (MOA).
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The company must confirm that its Articles of Association (AOA) authorize the issue of right shares. If required, the AOA must be amended to include provisions related to Rights Issue.
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Right shares can generally be offered only to existing shareholders of the company, subject to applicable legal provisions.
Who Can Apply for Rights Issue?
As per Section 62 of the Companies Act, 2013, the following persons may be eligible to receive and apply for Rights Issue shares:
Existing Shareholders
A company primarily offers right shares to its existing shareholders in proportion to their current shareholding by issuing a Letter of Offer.
The important requirements include:
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The company must issue a Letter of Offer specifying the number of shares available for subscription.
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Shareholders must be provided a minimum period of 15 days and a maximum period of 30 days to accept the offer.
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If shareholders do not respond within the prescribed period, the offer is considered declined.
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The Letter of Offer may provide shareholders with the right to renounce their entitlement in favour of another person.
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After the offer period expires or shareholders reject the offer, the Board of Directors may dispose of the unsubscribed shares in a manner beneficial to the company and shareholders.
Employees
A company may issue right shares to employees under an Employee Stock Option Plan (ESOP) by passing a special resolution and fulfilling the required legal conditions.
Other Eligible Persons
A company may also issue right shares to other persons by passing a Special Resolution, either for cash consideration or non-cash consideration.
In such cases, the share price is determined through a valuation process conducted by a registered valuer, who prepares a valuation report according to applicable regulations.
A properly managed Rights Issue Process helps companies raise capital efficiently while ensuring compliance with the Companies Act, 2013 and securities regulations.
Process for Issuing Rights Shares in India
The Rights Issue Process allows a company to offer additional shares to its existing shareholders in proportion to their current shareholding. To complete a Rights Issue of Shares, a company must follow specific legal procedures, documentation requirements, and compliance steps under applicable corporate laws.
The major steps involved in the issuance of Rights Shares in India are as follows:
Preparation of Existing Shareholder List
The directors must prepare a detailed list of existing shareholders along with information regarding their current shareholding. This helps determine the number of rights shares each shareholder is entitled to receive.
Drafting of Required Documents
The company needs to prepare the necessary documents for initiating the Rights Issue, including:
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Share Application Form
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Letter of Offer for Rights Issue
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Letter of Renunciation
These documents contain important details regarding the share offer and subscription process.
Issuance of Board Meeting Notice
A notice for the Board Meeting must be issued at least seven days before the scheduled meeting date. The notice should comply with the requirements of Section 173(3) of the Companies Act, 2013 and Secretarial Standard-1 (SS-1).
Conducting Board Meeting
The Board of Directors must conduct a meeting to discuss and approve important matters related to the Rights Issue, including:
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Approval of the Letter of Offer
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Approval of Share Application Form
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Approval of Rights Issue proposal
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Fixing the record date for determining eligible shareholders
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Deciding the rights issue ratio
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Determining the issue price of right shares
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Authorizing directors or the Company Secretary to execute necessary documents
Preparation and Circulation of Board Meeting Minutes
The Company Secretary prepares the minutes of the Board Meeting and circulates them to the directors within 15 days from the conclusion of the meeting.
The minutes may be sent through:
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Hand delivery
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Speed post
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Registered post
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Courier
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Email
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Other recognized electronic communication methods
Filing of Form MGT-14
After approval of the Board Resolution, the company is required to file Form MGT-14 with the Registrar of Companies (ROC) within 30 days.
However, public companies are exempt from filing certain Board Resolutions related to Rights Issue as per applicable provisions.
Dispatch of Letter of Offer
The company must send the Letter of Offer to all eligible shareholders through approved communication methods such as:
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Registered post
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Speed post
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Courier
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Email
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Hand delivery
The Letter of Offer should specify the number of shares offered and must generally remain open for a period of 15 to 30 days.
For private companies, a shorter period may be permitted if the required shareholder consent is obtained as per applicable provisions.
Receiving Shareholder Responses and Share Application Money
After receiving responses from shareholders regarding:
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Acceptance of Rights Shares
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Renunciation of Rights Shares
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Rejection of Rights Offer
along with the required share application money, the company must proceed with the allotment process.
A Board Meeting notice must be issued at least seven days before the meeting.
Allotment of Shares Within 60 Days
The company must complete the allotment of Rights Shares within 60 days from the date of receiving share application money.
If the company fails to allot shares within the prescribed period, it must refund the received amount within 15 days after completion of the 60-day period.
Failure to refund the application money may result in payment of interest at the applicable rate, including 12% per annum from the expiry of the prescribed period.
Preparation of Shareholder Details
The company must prepare a record of shareholders containing details such as:
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Shareholders who renounced their Rights Issue entitlement
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Shareholders who declined the Rights Offer
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Shareholders who subscribed for shares beyond their entitlement
Board Meeting for Share Allotment Approval
Within the prescribed period after receiving application money, the Board of Directors must conduct a meeting to approve:
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Allotment of shares to applicants
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Issuance of share certificates
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Updating the Register of Members
Preparation of Board Meeting Minutes
The Company Secretary must prepare and circulate the Board Meeting minutes within 15 days from the conclusion of the meeting through approved communication methods.
Preparation of List of Allottees
The directors must prepare a list of shareholders who have been allotted Rights Shares for filing purposes with the Registrar of Companies.
Filing of Form PAS-3
The company must file the Return of Allotment in Form PAS-3 along with the required attachments with the ROC within 30 days from the date of allotment of shares.
Updating Register of Members
As the final compliance step, the company must update the Register of Members by making necessary entries within seven days from the date of passing the Board Resolution for share allotment.
Following the complete Rights Issue Compliance Process ensures that the company successfully issues shares while meeting the requirements of the Companies Act, 2013 and related regulations.
Difference Between Right Shares and Bonus Shares
Understanding the difference between right shares and bonus shares is important for investors and shareholders because both are methods used by companies to issue additional shares to existing shareholders. Although both involve existing shareholders, they differ in terms of issue price, purpose, cash flow impact, and legal provisions.
Bonus Shares vs Right Shares: Key Differences
| Basis of Difference | Bonus Shares | Right Shares |
|---|---|---|
| Meaning | Bonus shares are additional shares issued by a company to its existing shareholders free of cost in proportion to their existing shareholding. These shares are issued from the company’s free reserves or accumulated profits. | Right shares are new shares offered by a company to its existing shareholders in proportion to their current shareholding, usually at a price lower than the prevailing market price. |
| Issue Price | Bonus shares are issued free of cost to shareholders. No payment is required to receive these shares. | Right shares are issued at a discounted price compared to the current market value of the company’s shares. |
| Cash Flow Impact | A bonus issue does not create any cash inflow for the company because shares are issued without receiving money from shareholders. | A right issue generates cash inflow because shareholders purchase additional shares by paying the issue price. |
| Consideration Received | The company does not receive any consideration as bonus shares are issued by capitalizing free reserves or retained earnings. | The company receives consideration in the form of money because right shares are issued against payment by shareholders. |
| Purpose of Issue | Companies generally issue bonus shares to reward existing shareholders and increase the number of shares held without raising additional funds. | Companies issue right shares mainly to raise additional capital for business expansion, debt repayment, or other financial requirements. |
| Approval Requirement | A bonus issue requires approval from the Board of Directors and compliance with the provisions of the Companies Act, 2013. | A right issue can be made by following the approval process under the Companies Act, 2013, including necessary resolutions where applicable. |
| Impact on Market Value | A bonus issue generally does not change the overall market capitalization of the company, although the share price may adjust due to the increase in the number of shares. | A right issue may affect the market value of shares depending on investor response, pricing, and the purpose of raising funds. |
| Governing Section | Bonus shares are regulated under Section 63 of the Companies Act, 2013. | Right shares are governed under Section 62 of the Companies Act, 2013. |
Bonus Shares and Right Shares: Conclusion
Both bonus shares and right shares are methods through which companies provide additional shares to existing shareholders. However, bonus shares are issued free of cost by using company reserves, whereas right shares are offered at a discounted price to raise fresh capital.
Investors should understand the difference between right shares and bonus shares before making investment decisions, as each type of share issue has a different impact on ownership, investment value, and company finances.
Frequently Asked Questions
A Rights Issue is a method by which a listed company offers new shares to its existing shareholders at a specific price, usually at a discount, in proportion to their existing shareholding.
Shareholders can apply for a Rights Issue by submitting the application form received from the company or by applying through online banking facilities using the ASBA process.
Yes, investors can apply online for Rights Issues through ASBA (Application Supported by Blocked Amount) facilities provided by banks or through online investment platforms.
The Value of Right is the benefit an existing shareholder receives by purchasing additional shares through a Rights Issue at a price lower than the current market value. It represents the difference between the market price of the share and its theoretical ex-rights price
The formula for calculating the Value of Right is Value of Right = Cum-rights Market Price − Theoretical Ex-rights Price (TERP). Another commonly used formula is (Market Price − Issue Price) ÷ (Number of Existing Shares Required + 1).
A Rights Issue is governed by Section 62(1)(a) of the Companies Act, 2013. The provision requires a company to first offer new shares to its existing shareholders in proportion to their existing shareholding.
A Rights Issue helps a company raise funds without taking loans or increasing debt. It also allows existing shareholders to maintain their ownership percentage by purchasing additional shares at a discounted price.
After a Rights Issue, the share price generally adjusts to the theoretical ex-rights price because additional shares are issued. However, the overall value of a shareholder\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\'s investment usually remains the same if they subscribe to the offer.
Only shareholders whose names appear in the company\\\'s records on the record date are eligible to apply for Rights Shares. They may subscribe to the offer, renounce their rights, or choose not to participate.
A Split Application Form allows an eligible shareholder to divide their rights entitlement into separate portions. This makes it easier to subscribe to part of the entitlement and transfer the remaining rights, where permitted.
Yes, a shareholder can use a Split Application Form to renounce their rights entitlement to two or more persons, subject to the terms of the Rights Issue and applicable legal provisions.
A Rights Issue allows a company to offer additional shares to its existing shareholders in proportion to their current holdings. Shareholders can accept the offer, renounce their rights, or ignore the offer within the specified period.
An alternative formula for calculating the Value of Right is (Market Price − Issue Price) ÷ (Number of Existing Shares Required + 1). This method is commonly used to determine the value of each right based on the issue ratio and the market price.
Yes, ASBA (Application Supported by Blocked Amount) is generally mandatory for listed Rights Issues. Under this process, the application amount remains blocked in the investor\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\'s bank account and is debited only after the shares are allotted.
The process of a Rights Issue involves approving the issue through a Board resolution, sending the offer letter to eligible shareholders, receiving applications, allotting the shares, and completing the required statutory filings with the Registrar of Companies.
Any company having a share capital, whether a private company or a public company, can issue Rights Shares to its existing shareholders in accordance with the provisions of the Companies Act, 2013.
The forms involved in a Rights Issue mainly include MGT-14 (where applicable) for filing Board resolutions and PAS-3 for filing the return of allotment after the shares are allotted.
Yes, a Rights Issue increases the company\\\\\\\\\\\\\\\'s subscribed and paid-up share capital when eligible shareholders subscribe to the offered shares and the allotment is completed.
In a Rights Issue, preference is given to existing equity shareholders. They receive the first opportunity to subscribe to additional shares in proportion to their current shareholding before the shares can be offered to others.
Yes, a Rights Issue is considered a pre-emptive right because it gives existing shareholders the first opportunity to purchase additional shares before the company offers them to outsiders.
In a Rights Issue, the company receives cash from shareholders who subscribe to the additional shares. This increases the company\\\\\\\'s funds without creating any repayment obligation like a loan
No, a company cannot issue Rights Shares without obtaining the necessary approval of the Board of Directors through a valid Board resolution. Compliance with the Companies Act, 2013 is mandatory.
A Rights Issue may temporarily affect the market price of shares due to the increase in the number of outstanding shares. However, it does not necessarily reduce the overall market value of the company.
Yes, the Articles of Association (AOA) should be reviewed before issuing Rights Shares to ensure that the company\\\\\\\'s internal rules permit the issue and do not impose any restrictions.
For many companies, a Rights Issue is a more economical option than bank borrowing because it raises capital without increasing debt or creating interest repayment obligations.
Yes, a company may incur expenses such as legal fees, filing charges, printing costs, and professional fees while completing the Rights Issue process and meeting statutory compliance requirements.
Rights Shares are issued in proportion to the existing shareholding of shareholders. For example, a company may offer one new share for every two shares already held by a shareholder.
Companies that need additional capital for business expansion, debt repayment, acquisitions, or working capital often choose a Rights Issue to raise funds from their existing shareholders.
Failure to comply with the provisions relating to a Rights Issue may result in penalties under the Companies Act, 2013. The company and its officers may be held liable for non-compliance, depending on the nature of the violation.
The issue price of Rights Shares is decided by the company\'s Board of Directors. It is usually lower than the prevailing market price to encourage existing shareholders to subscribe to the offer.
Where applicable, the company must file Form MGT-14 with the Registrar of Companies within 30 days from the date of passing the Board Resolution approving the Rights Issue.
A company should allot the Rights Shares within 60 days from the date of receiving the application money. Timely allotment ensures compliance with the Companies Act, 2013.
If a company fails to allot the Rights Shares within 60 days, it must refund the application money. Failure to refund within the prescribed time may require the company to pay interest as per the Companies Act, 2013.
A company cannot directly offer Rights Shares to outsiders. They must first be offered to existing shareholders. However, outsiders may receive the shares if the existing shareholders renounce their rights in their favour or if permitted by law.
Under the Companies Act, 2013, the offer for a Rights Issue must remain open for at least 15 days and not more than 30 days from the date of the offer, unless a shorter period is consented to by the required majority of shareholders where permitted.
No, a Special Resolution is generally not required for a Rights Issue under Section 62(1)(a) of the Companies Act, 2013. A Board Resolution is usually sufficient unless the company\'s Articles of Association or specific circumstances require additional approvals.