Rights Issue of Shares

Rights Issue of Shares

A private limited company issuing further shares shall offer the shares to existing shareholders in the ratio of their holding as rights shares as per provisions of Section 62 of Companies Act, 2013 and Companies (Prospectus and Allotment of Securities) Rules, 2014.

Rights issue of Shares means the issue of shares by a company to the existing shareholders to mobilise additional capital to the company.

The rights given to the existing shareholder is a pre-emptive right in which they get a preference to additional capital issued in the company in order to protect their existing shareholding percentage. The rights mentioned above is not an obligation, in the sense, they can choose not to take up the shares or renounce them in others favour post which their existing shareholding will be diluted.

1. Authorised Capital & Rights Issue of Shares

Authorized Capital or Registered Capital of a company is the upper limit of capital for which a company can issue shares and collect money from shareholders. The Company issuing shares on rights basis should have sufficient unissued authorized to accommodate further shares. In case the authorised capital is insufficient to accommodate fresh issues of shares, the company should increase the authorised capital first by passing a resolution at a meeting of shareholders.

2. Value of Shares

Rights issue of Shares can be issued ‘At Par’ (Face Value) or at a ‘Premium’ (above Face Value). If the shares are offered at the face value, it is referred as Issue at Par and if the shares are offered at a higher value than Face value, it is referred as Issue ‘At Premium’. 

(a) Issue of Shares at Par

When shares are issued at the face value of shares, the issue is referred to as ‘At Par’. If the shares are offered among promoters or their associates immediately after startup of the Company, the shares are offered at Par.

For eg: If the face value of Shares is ₹10.00 and the shares are offered at ₹10.00, it is called as issue of shares ‘At Par’.

(b) Issue of Shares at Premium

When shares are issued at a price higher than the face value of shares, the share issue is referred to as ‘At Premium’. If the shares are intended to be offered to external investors to mobilise funds, the shares are generally offered ‘At Premium’. The amount collected in excess of face value of shares is called ‘Share Premium’.

For eg: If the face value of Shares is ₹10.00 and the shares are offered at ₹100.00, it is called as issue of shares ‘At Premium’. The excess amount of ₹90.00 is referred to as ‘Share Premium’.

3. Renunciation of Rights Shares 

The shareholders have the option to accept or decline or renounce the offer of rights issue. Renouncing the shares means assigning the rights to subscribe the shares to another person.

Unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a rights exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person and the notice of offer of rights issue to the shareholder shall contain a statement of this rights of renunciation. 

4. Valuation of Shares

• In case the shares are issued ‘At Par’, there is no requirement of share valuation is not required
• In case the shares are issued ‘At Premium’,the company has to carry out share valuation under the requirements of Income Tax Act.
• In case the Rights issue of shares are offered to a Foreign Shareholder, the company has to get a share valuation as per requirements under FEMA.