The concept of Right issue of shares is governed by section 62(1)(a) of the Companies Act, 2013. The said section deals with provision related to increase in subscribed share capital of the Company by issue of further shares.

‘Right Issue’ means offering shares to existing shareholders in proportion to their existing shareholding. The object is, of course, to ensure equitable distribution of Shares and the proportion of voting rights is not affected by issue of Fresh shares.

Only one pre-emptive right is to be given: It is now well settled that only one pre-emptive offer is to be made which is otherwise (should be ‘either’) to be acceptable or not at all. The existing shareholders are not to be given further pre-emptive rights in respect of those unaccepted shares. Even such first right can be waived or modified.

A private Company was not required to make right offer under the Companies Act, 1956. Even though earlier there was not provision, it was held that the issue must be bona fide and can’t be made with oblique motives.

PROCEDURE FOR RIGHTS ISSUE OF SHARES

PROCESS OF RENUNCIATION OF SHARES

A. PROCESS OF RENUNCIATION OF SHARES BY THE SHAREHOLDER:

When the Existing Shareholder decides to renunciate their portion of shares to New Prospective Investor ,  the following procedure to be followed as “Issue of share to outsiders under Right issue of Shares”.

BY SHAREHOLDER

• Company will give offer to existing shareholders under Right Issue of Shares
• If a shareholder is not interested in accepting the offer of additional shares, he can renounce the same in favour of any other person, who may not be member of the Company. {This is the way by which Company can issue shares to outsiders under Right issue of shares}.
• Giving of such right of renunciation is mandatory: unless the Article of the company provide otherwise. The right must be specified in Letter of offer given to the Shareholder.
• Renounce by Shareholder: Normally ‘Right Issue’ is at a price lower than the prevalent market price A shareholder who may be short of funds can renounce his right to specified number of shares, by ‘Selling’ his right to subscriber.
• Exercise Both Rights: He can subscribe to part of his rights and renounce the balance. This is permissible

PROCESS BY COMPANY

• Company will give offer of “Renunciation” to existing shareholders in the Letter of Offer.
• If Shareholder wants to renunciation of Shares then shareholder will give a letter of renunciation in favour of renounce to Company.
• Company will receive an acceptance letter and share application money from the renounce.
• After closing of offer period company will hold a Board Meeting and allot shares to renounce.

B. PROCESS OF RENUNCIATION OF SHARES BY THE BOARD: PROCESS ON PART OF COMPANY:

• Company will give offer of “Renunciation” to existing shareholders in the Letter of Offer.
• If Shareholder don’t subscribe to the ‘right issue’. They may not even renounce their right to a third person.
• In such cases, the Board of Directors can dispose of the un-subscribed shares in manner which they think is most beneficial to the company.Board of Directors can allot the UN-subscribe portion of shares to any other person.
• Normally practice followed by good companies is to ask the Shareholders to apply for additional shares, over and above the shares allocable to them as a matter of right.
• The un-subscribed portion is allotted to the members who have applied for additional shares on an equitable basis and balance amount is refunded.

ISSUE OF SHARES UNDER CASH CONSIDERATION

Whether a Company can issue shares on Cash Consideration?

Right Issue of Shares: For right issue of shares Section- 62 of Companies Act, 2013 will apply. According to my understanding: Companies Act, 2013 doesn’t restrict to issue shares on cash. No method is provided in Companies Act, 2013 u/s 62 for issue of shares.

Like mentioned in Private Placement of Shares Section- 42.
In Section- 42 of Private Placement of Shares its mentioned that company will receive money from the subscriber in the Bank account of Company. That’s mean subscriber have to make payment through Banking channel not by cash. But such restriction is not given under Section – 62 for right issue of shares.

Based on the above explanation, the company can issues shares for Cash Consideration. However, question might arise from Income tax perspective, so please refer the Income tax provision for acceptance of cash.

NOTES:

Prospectus not required in right offer even with right of renunciation:

Section 23(2) of the Companies Act, 2013 clearly states that issue of prospectus is not necessary in right issue whether with or without right of renouncement.

Department has also clarified vide letter No. 8/81/56-PR dated 04.11.157 that issue of rights share is a ‘domestic concern’ and hence issue or registration of

prospectus is not necessary.

Section 62(1)(a) of the Companies Act, 2013 states that company making right issue should send a letter of offer.

No prospectus is required for ‘right issue’ to existing members, even if the members have right to renounce the right to a third person, who may or may not be a member.

Fraction right in case of Right Issue of Shares:

Sometimes, right issue may result in fractional right.

The offer of further shares should be offered to holders of equity shares in proportion to the existing paid up capital. Thus, legally, such fractional right can be ignored. However, this becomes unfair, particularity to small shareholder.

CONCLUSION

Rights issue is followed under Equity Shares and Preference shares and priority is given to the Existing category of Shareholders and as per the quantum of Shares issue, paid up capital also increases and shall be shown under Master details category on Ministry of Corporate Affairs (MCA) portal.