Right issue is an issue of rights to a company’s existing shareholders that entitles them to buy additional shares directly from the company in proportion to their existing holdings, within fixed period of time.
What is right issue as per companies act 2013?
According to the provision of section 62(1)(a) of the companies act, 2013 any company, public or private, which is desirous of raising its subscribed capital by issue of further shares.
Whenever a company intends to issue new shares, the voting and governance rights of the existing shareholders may be diluted , if they are not allowed to preserve them. It may happen because new shareholders may subscribe to the issued capital.
Therefore , companies act 2013, allows existing shareholders to preserve their position by offering those newly issued shares at first instance to them.
The existing shareholders are given a right to subscribe these shares, if they like. However, if they do not desire to subscribe these shares. They are even given the right to renounce it in favour of someone else. (unless the articles of the company prohibits such a right to renounce).
In nutshell, the existing shareholders have right to subscribe to any fresh issue of shares by company in proportion to their existing holding for shares. They have an implicit right ot renounce this right in favor of anyone else , or even reject it completely.
In other words, the existing shareholders have right of first refusal. It means the existing shareholders enjoy right to either subscribe for these shares or sell their rights or reject offer.
Company desirous of issuing right share according to section 62(1) (a) of companies act 2013 shall comply following conditions:
- The offer shall be made by notice specifying the number of shares offered.
- The offer shall be open for less than 15 days but not more than 30 dyays.
- If offer letter is not accepted within specified period, it shall deemed to have been declined on the hand of shareholders.
- Unless the articles of the company otherwise provide. The offer aforesaid shall be deemed to include right exercisable by person concerned. To renounce shares offered to him or any of them in favour of any other person. And the notice (referred to in above bullet point) shall contain a statement of this right.
- After the expiry of time specified in notice aforesaid , or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered . the board of directors may dispose of them in such manner which is not disadvantageous to the shareholders and the company.
Financial Effects of a further issue?
The financial position of a business is contained in the balance sheet. Further issue of shares increase the amount of equity as well as the liquid resources (Bank) .
The amount of equity is the product of further number of shares issued multiplied by issue price. The issue price may be higher than the face value ( issue at premium).
Companies act does not allow issue of shares at a discount , except issue of sweat equity shares under section 53.
What are the advantages of right Issue?
- Right issue enables the existing shareholders to maintain their proportional holding in the company & retain their financial and governance rights. It works as a deterrent to the management. Which may like to issue shares to known persons with a view to have a better control over the company’s affairs.
- In well-functioning capital markets, the right issue necessarily leads to dilution in the value of share. However, the existing shareholders are not affected by it because getting new shares at a discounted value from their cum-right value will compensate decrease in the value of shares.
- The cum-right value is maintained otherwise also, if the existing shareholders renounce their right in favour of a third party.
- Right issue has an image enhancement effect, as public and shareholders view it positively.
- The chance of success of a right issue is better than that of a general public issue and is logistically much easier to handle.
Disadvantages of right issue?
- The right issue invariably leads to dilution in the market value of the share of the company .
- The attractive price of the right issue should be objectively assessed against its true worth to ensure that you get a bargained deal.
What are the effects of right issue?
Following are the effect of right issue:
- Maintenance of existing shareholders proportional holding in company and retain their financial and governance rights.
- Dilution in the value of shares
- Image enhancement
- Convenience in handling issue.
Example of right issue
A company having 1,00,000 shares of Rs. 1 each as its issued capital and having a market value of Rs. 46 issues right shares in the ratio of 1:10 at an issue price of Rs. 31.
Solution:
Means total right shares will be issued by the company is 1,00,000×1/10 = 10,000 shares
Therefore company will issue 10,000 right shares to the existing shareholders at issue price is Rs. 31.
