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Schedule A Demo

Procedure for Right Issue of Equity Shares by a Private/Public Limited Company

Background

  • Where a company having share capital proposes to increase its subscribed capital by issuing further shares, such shares shall be offered to the existing equity shareholders of the company in proportion to the paid-up share capital of those shares by sending letter of offer. (Section 62 (1) (a) of the Companies Act, 2013)

Sections/ Rules/Regulation:

  • Sections 39, 56, 61, 62, 101, 173, 179, 450 of the Companies Act, 2013
  • Rule 9A, 9B, 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
  • Secretarial Standards-1
  • Rule 5 of the Companies (Share Capital & Debentures) Rules, 2014

Pre-requisites & Important Points

  • As per Section 62 of the Companies Act, 2013:
    • A board meeting shall be held for the issue of right issue of equity shares
    • The offer of right issue shall be made by giving notice which will specify the number of shares a company is offering for the right issue and limiting a time not being less than fifteen days [or such lesser number of days as may be prescribed] and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined
    • The notice of such offer shall include a statement for right of renunciation which can be exercised by the person concerned in favor of any other person unless Article of Association (AoA) of the company provides otherwise.
    • Where the offer made to the concerned person is rejected either by him declining the offer or by not replying within the specified time period, the Board of Directors of the company can dispose those shares in a manner which is not disadvantageous to the shareholders of the company.
    • The resolution for the right issue to be passed in board meeting only and not by the circulation. (Section 179 (3) (c) of the Companies Act, 2013)

Procedure:

  • The issue of shares on rights basis shall be within the limits of Authorized share capital of the company. If it is likely to exceed the limits, then first authorized capital needs to be increased by virtue of the authority contained in the AOA (U/s 61 of Companies Act 2013) and if there is no provision in the AOA, they also need to be altered.
  • Meeting of Board of Directors to be convened for approval of Rights Issue and Letter of Offer

Meeting of Board

  • As per Section 173 of the Companies Act, 2013 and Secretarial Standard-1:
    • Notice of the Board Meeting shall be issued to all Directors at their registered addresses by post or hand delivery or by electronic means at least 7 days before the date of the board meeting, with provision for shorter notice in case of urgent business.
    • The notice shall include Agenda, Notes to Agenda, and Draft Resolution.
    • The Board Meeting shall pass resolutions to:
      • Approve the issue of shares through right issue
      • Approval of Draft Letter of Offer
      • Pass necessary Board Resolution for the rights issue of equity shares, approval of Draft Letter of Offer,etc
      • Authorize a director or Company Secretary to sign and file the relevant forms with the registrar of the company.
    • Draft Minutes shall be prepared and circulated within 15 days from the conclusion of the Board Meeting.
    • The company shall dispatch letter of offer through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least three days prior to the opening of the issue of shares.
    • In the case of public companies a copy of the Board resolution shall be filed with the registrar in Form MGT-14 within 30 days of passing of Board resolution. The same is not mandatory for private companies.
    • The time for accepting the offer will not be less than 15 days which will not exceed 30 days from the date of the offer. If the acceptance is not received within the specified time limit, then the offer shall deemed to be rejected.
      • For private limited companies the period can be reduced to less than 15 days if the same has been consented by 95% of the members of the company.
    • Shareholders shall accept or reject the offer.
    • The Board of Director shall hold board meeting within 60 days of receiving money for allotment of shares.
  • As per Section 173 of the Companies Act, 2013 and Secretarial Standard-1:
    • Notice of the Board Meeting shall be issued to all Directors at their registered addresses by post or hand delivery or by electronic means at least 7 days before the date of the board meeting, with provision for shorter notice in case of urgent business.
    • The notice shall include Agenda, Notes to Agenda, and Draft Resolution.
    • The Board Meeting shall pass resolutions to:
      • Allot the right issue of equity shares.
      • Authorize a director or Company Secretary to sign and file the relevant forms.
    • Draft Minutes shall be prepared and circulated within 15 days from the conclusion of the Board Meeting.

Post Allotment Requirements

  • Whenever a company having a share capital makes any allotment of its securities, the company shall, within thirty days of allotment of shares file with the Registrar a return of allotment in Form PAS-3, along with the fee as specified in the Companies (Registration Offices and Fees) Rules, 2014. (Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014). PAS-3 shall be furnished along with the following:
    • List of Allottees along with their names, address, occupation, number of securities allotted
    • Report of Registered Valuer for valuation of consideration for issuance of shares for consideration other than cash and conversion
    • Where shares are allotted for consideration other than cash, c copy of contract pursuant to which shares have been allotted together with contract for sale/services or other consideration
    • Resolution for allotment of Rights Shares
  • Where the shares are held in demat mode, the company shall intimate the Depository the details of allotment immediately on allotment of such shares
  • A Private Company shall make necessary entries in the Register of Members in Form MGT-1 within 7 days of board meeting in which allotment of equity shares was approved if the shares are not allotted in demat.
  • [Rule 9 A of the Companies (Prospectus and Allotment of Securities) 2014 prescribes that every unlisted public company except a Nidhi, a Government Company and a Wholly Owned Subsidiary shall issue the securities only in dematerialised
  • Rule 9B of the Companies (Prospectus and Allotment of Securities) 2014 prescribes every private company other than small company to issue shares only in demat form and facilitate demat of all securities by 30.09.24. This date has been further extended till 30.06.25 for Private companies other than Producer Company which is not a small company vide MCA File no: F. No.1/21/2013-CL-V dated 12.02.25]
  • Where the shares are not allotted in demat form, the company shall issue the certificate of shares in Form SH-1, duly stamped within a period of 2 months from the date of allotment of the shares. (Section 56 (4) of the Companies Act, 2013 read with Rule 5 of the Companies (Share Capital & Debentures) Rules, 2014)

Punishments & Penalties

  • As per Section 450 of the Companies Act, 2013:
    • The company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continue, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person

Note: Listed Companies have to comply with the SEBI Regulations for Right issue of equity shares.

Disclaimer: The information contained in this Article is intended solely for personal non-commercial use of the user who accepts full responsibility of its use. The information in the article is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. We make no representation or warranty of any kind, express or implied regarding the accuracy, adequacy, reliability or completeness of any information on our page/article. 

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