What is Rights Issue?
A rights issue is an invitation to existing shareholders to purchase additional new shares in the company at a specific price within a stipulated time period. This is governed by Section 62 of the Companies Act 2013, which gives existing shareholders the first right to subscribe to new shares in proportion to their existing holdings.
Key Features of Rights Issue
- • Offered only to existing shareholders on record date
- • Proportionate to existing shareholding
- • Offered at a price, usually at a discount to market price
- • Shareholders can subscribe, renounce, or let lapse
- • Does not dilute existing shareholders if fully subscribed
- • Renounced rights can be traded (for listed companies)
Why Companies Opt for Rights Issue
Raise Capital
Raise fresh capital for expansion, debt repayment, or working capital without diluting existing shareholders.
Strengthen Balance Sheet
Improve debt-equity ratio and financial stability by infusing equity capital.
Reward Loyalty
Existing shareholders get opportunity to increase stake at preferential price.
Avoid Public Issue Costs
Rights issue is simpler and less expensive than public offering or private placement.
Legal Framework
Companies Act 2013 - Section 62
Section 62(1)(a) provides that when fresh shares are issued:
- • They must first be offered to existing equity shareholders
- • In proportion to their paid-up share capital
- • On the same terms as offered to others
- • Subject to specified time limit (not less than 15 days)
- • Directors may dispose of unsubscribed shares in manner beneficial to shareholders
SEBI ICDR Regulations (for Listed Companies)
Chapter IV
Rights Issue of specified securities by listed companies.
Key Requirements
Pricing, minimum subscription, record date, and disclosure norms.
Unlisted Companies
For unlisted companies, rights issue is governed primarily by Companies Act provisions. No SEBI approval required, but pricing should be fair and not prejudicial to minority shareholders.
Rights Issue Process
Step 1: Board Meeting
- • Approve rights issue in principle
- • Determine issue size and pricing
- • Fix record date
- • Approve draft letter of offer
- • Authorize committee for implementation
Step 2: Intimate Stock Exchange (Listed Companies)
- • File intimation of board meeting
- • File outcome of board meeting
- • Obtain in-principle approval from stock exchanges
Step 3: Draft Letter of Offer
- • Prepare letter of offer as per SEBI format (for listed)
- • Include: offer details, pricing, ratio, timeline, use of funds
- • Get valuer certificate (if required)
Step 4: Record Date
- • Determine shareholders entitled to rights
- • At least 3 working days advance notice (SEBI)
- • Close transfer books if necessary
Step 5: Dispatch Letter of Offer
- • Dispatch to all shareholders on record date
- • Include: application form, rights entitlement details
- • Minimum 15 days for acceptance
Step 6: Issue of Rights Entitlements (Listed Companies)
- • Credit rights entitlements to demat accounts
- • Rights entitlements are tradable on exchanges
- • ISIN is created for rights entitlements
Step 7: Application and Payment
- • Shareholders apply for rights shares
- • Payment of application money
- • ASBA facility available for listed companies
Step 8: Basis of Allotment
- • Prepare basis of allotment
- • Allot shares to successful applicants
- • Refund excess money if any
Step 9: Allotment and Post-Issue Compliance
- • Issue share certificates (or credit to demat)
- • File PAS-3 with ROC within 30 days
- • List shares on stock exchange (listed companies)
- • Update registers and records
Pricing Guidelines
For Listed Companies (SEBI ICDR Regulations)
- • Price must not be less than the higher of:
- • Average of weekly high and low of closing prices during 6 months preceding record date
- • Average of daily high and low of prices during 2 weeks preceding record date
- • Or any other price justified by a registered valuer
For Unlisted Companies
- • No statutory pricing guidelines
- • Price should be fair and reasonable
- • Valuation by registered valuer recommended
- • Must not be prejudicial to minority shareholders
- • FMV considerations for tax purposes
Rights Issue Pricing Considerations
- • Usually offered at discount to market price (for listed)
- • Deep discount may trigger minimum pricing norms
- • Fair value certificate from valuer recommended
- • Consider impact on EPS and existing shareholders
Renunciation of Rights
What is Renunciation?
Renunciation is the process by which a shareholder gives up their right to subscribe to the rights issue and transfers this right to another person. This can be done either for consideration (sale) or without consideration (gift).
Types of Renunciation
Full Renunciation
Shareholder renounces entire rights entitlement in favor of another person.
Partial Renunciation
Shareholder renounces part of rights entitlement and subscribes for remaining part.
Process of Renunciation
- • Fill Form 2 (Renunciation Form) attached to letter of offer
- • Mention details of renouncee(s)
- • Sign and submit to company/RTA
- • For listed companies, rights entitlements can be traded on exchanges
- • Renouncee applies using Form 3 or 4
Rights Entitlement Trading (Listed Companies)
SEBI has introduced dematerialized trading of rights entitlements:
- • Rights entitlements credited to demat accounts
- • Traded on stock exchanges like shares
- • Separate ISIN for rights entitlements
- • Trading window typically 3-5 days
- • Settlement on T+2 basis
Split Application
A shareholder can:
- • Apply for full entitlement themselves
- • Renounce full entitlement to one or more persons
- • Apply for some shares and renounce balance
- • Let the rights lapse (not recommended)
Rights Issue in Unlisted Companies
Simplified Process
For private limited and unlisted public companies:
- • Board meeting to approve rights issue
- • Send offer letter to existing shareholders
- • Minimum 15 days for acceptance
- • Receive applications and money
- • Allot shares and file PAS-3
Special Considerations
- • No stock exchange approvals required
- • No minimum pricing guidelines
- • Stamp duty on share certificates as per state rates
- • Valuation recommended for determining fair price
- • Allotment within 60 days of receipt of application money
Additional Requirements for Listed Companies
SEBI ICDR Regulations Requirements
- • Minimum 90% subscription mandatory
- • If not achieved, full refund within 15 days
- • Pricing as per regulation 10 read with regulation 6
- • Credit rating not mandatory for rights issue
- • Minimum 3 working days notice for record date
Disclosure Requirements
- • Intimation to stock exchanges of board meeting
- • Publication of advertisement in newspapers
- • Upload letter of offer on company website
- • Post-allotment advertisements
Stock Exchange Approvals
- • In-principle approval before issue opening
- • Final approval for listing of shares
- • Compliance with Listing Regulations
Accounting Treatment
On Receipt of Application Money
Dr. Bank Account
Cr. Rights Issue Application Money Account
On Allotment
Dr. Rights Issue Application Money Account
Cr. Share Capital Account (face value)
Cr. Securities Premium Account (premium, if any)
On Refund (if any)
Dr. Rights Issue Application Money Account
Cr. Bank Account
Tax Implications
For the Company
- • No tax on issue of shares
- • Stamp duty on share certificates
- • Securities premium credited to separate account
For Shareholders
- • No tax on subscription to rights shares
- • Cost of acquisition = Amount paid for rights shares
- • If rights sold/renounced: Sale proceeds taxable as capital gains
- • Period of holding starts from allotment date
Tax on Sale of Rights Entitlement
When a shareholder renounces/sells rights entitlement:
- • Consideration received is taxable as capital gains
- • Cost of acquisition is considered nil
- • Short-term capital gains if sold within relevant period