FAQs on Right issue under Companies Act 2013

A rights issue is a primary method of raising capital where a company offers new equity shares to its existing equity shareholders in proportion to their current paid-up share capital and is governed by Section 62(1)(a) of the Companies Act 2013. The fundamental objective of a Rights Issue is to ensure an equitable distribution of new shares, thereby preventing the dilution of the existing shareholders' voting and economic rights unless they voluntarily choose not to subscribe to the newly offered shares.

Any company having a share capital and incorporated under the Companies Act, 2013, including a private company or a public company, may undertake a Rights Issue in accordance with Section 62(1)(a) of the Companies Act 2013.

There are no specific statutory restrictions relating to the size, turnover, or age of the company for raising funds through a Rights Issue.

However, the company must ensure that its authorised share capital is adequate to accommodate the proposed allotment of shares. If the authorised share capital is insufficient, the company must first increase its authorised share capital by altering its Memorandum of Association and completing the requisite statutory filings before proceeding with the Rights Issue.

The procedural framework under the Companies Act 2013 involves the following key steps:

• Convene a Board Meeting: Send notice to directors and hold a Board Meeting to approve the rights issue, fix the price, determine the ratio of the issue, and set the record date.
• Draft the Letter of Offer: Prepare the formal Letter of Offer detailing the number of shares, price, and the opening/closing dates of the offer.
• Dispatch the Letter of Offer: Dispatch the offer letter through registered post, speed post, or electronic mode to all eligible shareholders at least three days before the opening of the issue.
• Offer Period: Ensure the offer remains open for the required period to enable shareholders to exercise their right to accept, renounce, or reject the shares.
• Second Board Meeting: Once the offer period closes, convene a second Board Meeting to formally allot the shares to the subscribing shareholders (and renounces, if any).
• ROC Compliance: File the Return of Allotment in Form PAS-3 with the Registrar of Companies (ROC) within 30 days of the allotment.
• Issue Share Certificates: Issue and deliver the share certificates to the allottees within two months from the date of allotment.

As per Section 62(1)(a)(i) of the Companies Act 2013, the offer must remain open for a minimum period of fifteen (15) days and a maximum period of thirty (30) days from the date of the offer. If the shareholder does not communicate their acceptance within this specified time limit, the offer is legally deemed to be declined.

However, the Central government has inserted Rule 12A into the Companies (Share Capital and Debenture) Rules 2014 via the Companies (Share Capital and Debenture) Amendment Rules, 2021 which governs the time period for the notice issued under Section 62(1)(a)(i). According to this rule, in the present scenario, an offer letter for issuance of shares under rights issue should now remain open for a minimum of seven (7) days and a maximum of thirty (30) days. Following such a decline, the Board of Directors may dispose of the unsubscribed shares in a manner that is not disadvantageous to the shareholders and the company.

The process of issuance of shares via right issue is subject to statutory timelines prescribed under the Companies Act, 2013, and generally spans approximately 30 to 45 days from the first Board Meeting until completion of the final ROC filing.

• Notice Dispatch: The offer letter must be dispatched at least 3 days before the issue opens.
• Offer Period: The offer must remain open for a minimum of 7 days and a maximum of 30 days. Provided, for Private Companies, this period can be shorter if 90% of the members give their consent in writing or electronically.
• ROC Filing: Filing of Form PAS-3 must be done within 30 days of the final allotment.

The company must prepare and maintain several critical documents to ensure compliance with the Act. The primary documents include the notices and minutes of the Board meetings where the issue and the allotment are approved. Furthermore, the company must draft a comprehensive Letter of Offer detailing the number of shares offered, the issue price, and the timeline for acceptance. The company must also collect the formal acceptance and renunciation forms from the shareholders, as may be applicable.

Post-allotment, the company is required to file Form PAS-3 (Return of Allotment) with the Registrar of Companies within thirty days of the allotment, accompanied by a certified list of allottees.

Lastly, the company must issue the physical or dematerialised share certificates within two months from the date of allotment and subsequently update its Register of Members.

Yes, an existing shareholder has the right to renounce the shares offered to them in favor of any other person, unless such right is restricted by the company’s Articles of Association. This right is provided under Section 62(1)(a)(ii) of the Companies Act, 2013. The person in whose favour the rights are renounced (the renouncee) need not be an existing shareholder of the company, thereby enabling the induction of new investors into the company’s shareholding structure.

Under Section 62(1)(a) of the Companies Act, 2013, the primary restriction is that whenever a company with a share capital proposes to increase its subscribed capital by the issue of further shares, those shares must be offered first to the existing equity shareholders.

Furthermore, this offer must be strictly in proportion to the paid-up share capital on those shares at the date of the offer. A company cannot arbitrarily allocate these shares to outsiders or alter the allocation proportion without the existing shareholders formally renouncing their rights, or alternatively, bypassing the rights issue route entirely to pursue a preferential allotment via a special resolution under Section 62(1)(c) of the Companies Act 2013.

To protect shareholders from being rushed into a financial decision, the Companies Act imposes strict procedural and timeline restrictions. According to Section 62(1)(a)(i) and its rules thereunder:

• Dispatch of Notice: The letter of offer must be dispatched through registered post, speed post, or electronic mode to all existing shareholders at least 3 days before the opening of the issue.
• Offer Window: The subscription offer must remain open for a minimum of 7 days and cannot exceed a maximum of 30 days.
• Deemed Decline: If a shareholder does not explicitly accept the offer within this statutorily restricted timeframe, the Companies Act 2013 dictates that the offer is deemed to be declined, and the Board of Directors may dispose of the shares in a manner not disadvantageous to the company and the shareholders.

Yes, subject to an important clarification: the relaxations are granted to private companies under the MCA exemption notification dated 5 June 2015, rather than specifically on the basis of “small company” status.

Under these exemptions, a private company may reduce the statutory offer period for a rights issue with the consent of at least 90% of its members, given in writing or through electronic mode. This enables the company to complete the dispatch of the letter of offer and close the rights issue within a significantly shorter timeframe than the standard statutory period, thereby facilitating a faster capital-raising process.

This is a common misconception that requires a gentle correction. For a standard Rights Issue under Section 62(1)(a), the Companies Act, 2013 does not provide any distinct exemptions exclusively for DPIIT-recognized "Startup Companies." Startups rely solely on the Private Company exemptions mentioned above (such as the 90% consent rule) to expedite their rights issues.

Yes, if any of the existing shareholders participating in the Rights Issue are non-residents, the company must strictly comply with the Foreign Exchange Management Act, 1999 (hereinafter FEMA), and the relevant regulations prescribed by the Reserve Bank of India.

Under FEMA pricing guidelines, the issue price of shares allotted to non-resident investors must be in accordance with the prescribed valuation norms under the FEMA (Non-Debt Instruments) Rules, 2019.

Following the allotment, the company is required to file Form FC-GPR on the FIRMS portal within thirty days, reporting the issuance of shares to non-resident investors as part of foreign direct investment reporting obligations.