How to issue new shares to share holders of a company
Rights Issue = Shares issued to existing share holders
Shareholder Rights: Concepts and Procedures
A rights issue of shares is when a company issues shares to its existing shareholders in order to raise additional capital. When a private limited company issues additional shares, it must offer them as rights shares to existing shareholders in the proportion of their holding. Rights shares may be issued at par or at a premium.
A company may issue rights shares to raise additional capital to meet various requirements. The rights shares shall be issued exclusively to existing shareholders and not to the general public.
The existing shareholder is granted a pre-emptive right, which gives them priority over any additional capital raised in the company in order to protect their current shareholding percentage. The rights outlined above are not obligatory; they may choose not to acquire the shares or to renounce them in favour of others, in which case their existing shareholding will be diluted.
The Company issues shares on a rights basis because it is the simplest and most cost-effective method of raising additional funds.
Shareholders' Rights - Concepts
a. Authorized Capital & Share Rights Issue
A company's authorised capital, or registered capital, is the maximum amount of capital for which it may issue shares and collect money from shareholders. If the company is issuing shares on a rights basis, it should have an adequate amount of unissued authorised shares to accommodate additional shares. If the authorised capital is insufficient to accommodate new share issues, the company should first increase the authorised capital through a shareholder resolution.
b. Share price for the Rights Issue
Shares may be issued 'At Par' (Face Value) or 'Premium' (above Face Value). If the shares are offered at face value, the transaction is referred to as a 'Issue at Par'; if the shares are offered at a premium to their face value, the transaction is referred to as a 'Issue at Premium'.
Generally, if the shares are offered to promoters or their associates immediately after the Company's formation, they are offered at par value, whereas if the shares are offered to external investors to raise capital, they are offered at premium value. The share premium will be determined by valuing the Company's shares in light of its future profitability.
I 'At Par' Issuance of Shares
When shares are issued at face value, the transaction is referred to as a 'At Par' issue. If shares are offered to promoters or their associates immediately following the Company's formation, they are offered at par.
For instance, if the face value of the shares is $10.00 and they are offered at $10.00, this is referred to as a 'At Par' issue of shares.
(ii) Issuance of 'Premium' Shares
When shares are issued at a premium to their face value, the transaction is referred to as a 'At Premium' issue. If the shares are to be offered to external investors in order to raise capital, they are typically offered 'At Premium'. 'Share Premium' refers to the amount collected in excess of the face value of shares.
For instance, if the face value of the shares is $10.00 and they are offered at $100.00, this is referred to as a 'At Premium' issue of shares. The additional $90.00 is referred to as 'Share Premium.'
c. Shares Valuation
- If the shares are issued 'At Par,' no share valuation is required.
- If the shares are issued 'At Premium,' the company is required to conduct a share valuation in accordance with the provisions of the Income Tax Act.
- If the company offers a rights issue of shares to a foreign shareholder, the company must obtain a share valuation in accordance with FEMA requirements.
d. A shareholder's renunciation of Rights shares
The shareholders may accept, decline, or renounce the rights issue offer. Renouncing shares entails the transfer of the right to subscribe to the shares to another party.
Unless the company's articles provide otherwise, the aforementioned offer shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of another person, and the notice of offer of rights issue to the shareholder shall include a statement of these renunciation rights.
e. Request for an increase in the number of shares.
A shareholder who has been assigned rights shares or who has acquired rights shares through renunciation may apply for fewer or more shares than the number of rights shares assigned to them. However, the board of directors retains discretion over the allocation of shares in excess of the rights shares.
f. Timelines for the Resolution of Rights Issues
The offer for rights issue must remain open for a minimum of 15 days, or such shorter period as the Board of Directors may specify. Offers for Rights should be kept open for a maximum of 30 days. If the offer is not accepted within the specified time period, it is deemed declined.
g. Issuance of rights shares to non-shareholders
After the rights issue offer period has expired, or earlier if the shareholder to whom the rights shares are offered declines the rights through a notice, the Board of Directors may dispose of unsubscribed rights shares in a manner that is not detrimental to the shareholders or the company. This means that the Board may allot unsubscribed rights shares to any third party of its choosing following the close of the rights issue. Additionally, there are no time limits specified in the Act or Rules for the board to allot the shares to a person other than an existing shareholder.
h. Dilution of Existing Shareholders' Positions
When a company issues additional shares, whether through a rights issue or otherwise, the shareholding percentages of existing shareholders are altered, unless all existing shareholders subscribe for the entire number of rights shares.
Dilution of shareholdings refers to changes in the shareholding percentages of existing shareholders as a result of excessive subscriptions or allocations to third parties, either through renunciation or the exercise of Board powers.
Process for Issuing Rights to Shares
1.Board of Directors Meeting:
The Company's Board of Directors must decide the following at its meeting:
- Issuance of additional shares to existing shareholders on a rights basis
- The ratio at which Rights shares are offered for sale.
- The price at which shares will be issued.
- Deadlines for the commencement/closure of the rights issue.
2. Offer Letter for Rights Issue
The company must first send a Letter of Offer to its shareholders. The shareholders should be notified of the share issue and given the option to accept the shares offered to them.
The letter of offer should be sent to all shareholders via registered mail, overnight delivery, or electronic transmission at least three days prior to the issue's opening.
The notice must specify the number of shares being offered.
3. Receipt of money from Share subscriptions
The shareholders who accepted the offer must submit the application money with their acceptance application.
4. Share Allotment
Following the close of the offer period for the rights issue, the Board of Directors shall allot the shares to shareholders who accepted the offer for the rights issue.
5. Submitting an Allotment Return (Form PAS-3) to the Registrar of Companies (ROC)
Following the allotment of shares, the company must file a Return of Allotment (Form PAS-3) with the Registrar of Companies (ROC) within 30 days of the date of allotment of shares certified by a Company Secretary in Practice / Chartered Accountant in Practice / or Cost Accountant in Practice, along with the appliance filing fee.
The form PAS-3 shall be accompanied by a certified true copy of the resolution and a list of allottees.
If the Return of Allotment is not filed within 30 days of the allotment date, an additional filing fee will be assessed.
6. Share certificate issuance
Within two months of the date of allotment of the shares, the company must issue Share Certificates to each allottee of the Rights Issue.
The Share Certificates in Form No. SH-1 and the Certificate must include the name of the person to whom it is issued, his folio number and the number of shares, as well as the certificate's distinctive number and the amount paid on those shares.
The Company's Share Certificates must be stamped in accordance with the applicable State Stamp Act and Stamp Rules. State-by-state stamp duty on share certificates varies. Non-payment of stamp duty on share certificates renders them null and void.
If the Company fails to deliver the share certificates within the prescribed period, the company shall be fined between Rs.25,000.00 and Rs.5,00,000.00, and each officer who fails to do so shall be fined between Rs.10,000.00 and Rs.1,00,000.00.
Want Your Company to Issue Shares?
Contact us to learn more about how we can assist you with your company's rights issue.
Shareholder Rights: Concepts and Procedures
A rights issue of shares is when a company issues shares to its existing shareholders in order to raise additional capital. When a private limited company issues additional shares, it must offer them as rights shares to existing shareholders in the proportion of their holding. Rights shares may be issued at par or at a premium.
A company may issue rights shares to raise additional capital to meet various requirements. The rights shares shall be issued exclusively to existing shareholders and not to the general public.
The existing shareholder is granted a pre-emptive right, which gives them priority over any additional capital raised in the company in order to protect their current shareholding percentage. The rights outlined above are not obligatory; they may choose not to acquire the shares or to renounce them in favour of others, in which case their existing shareholding will be diluted.
The Company issues shares on a rights basis because it is the simplest and most cost-effective method of raising additional funds.
Shareholders' Rights - Concepts
a. Authorized Capital & Share Rights Issue
A company's authorised capital, or registered capital, is the maximum amount of capital for which it may issue shares and collect money from shareholders. If the company is issuing shares on a rights basis, it should have an adequate amount of unissued authorised shares to accommodate additional shares. If the authorised capital is insufficient to accommodate new share issues, the company should first increase the authorised capital through a shareholder resolution.
b. Share price for the Rights Issue
Shares may be issued 'At Par' (Face Value) or 'Premium' (above Face Value). If the shares are offered at face value, the transaction is referred to as a 'Issue at Par'; if the shares are offered at a premium to their face value, the transaction is referred to as a 'Issue at Premium'.
Generally, if the shares are offered to promoters or their associates immediately after the Company's formation, they are offered at par value, whereas if the shares are offered to external investors to raise capital, they are offered at premium value. The share premium will be determined by valuing the Company's shares in light of its future profitability.
I 'At Par' Issuance of Shares
When shares are issued at face value, the transaction is referred to as a 'At Par' issue. If shares are offered to promoters or their associates immediately following the Company's formation, they are offered at par.
For instance, if the face value of the shares is $10.00 and they are offered at $10.00, this is referred to as a 'At Par' issue of shares.
(ii) Issuance of 'Premium' Shares
When shares are issued at a premium to their face value, the transaction is referred to as a 'At Premium' issue. If the shares are to be offered to external investors in order to raise capital, they are typically offered 'At Premium'. 'Share Premium' refers to the amount collected in excess of the face value of shares.
For instance, if the face value of the shares is $10.00 and they are offered at $100.00, this is referred to as a 'At Premium' issue of shares. The additional $90.00 is referred to as 'Share Premium.'
c. Shares Valuation
- If the shares are issued 'At Par,' no share valuation is required.
- If the shares are issued 'At Premium,' the company is required to conduct a share valuation in accordance with the provisions of the Income Tax Act.
- If the company offers a rights issue of shares to a foreign shareholder, the company must obtain a share valuation in accordance with FEMA requirements.
d. A shareholder's renunciation of Rights shares
The shareholders may accept, decline, or renounce the rights issue offer. Renouncing shares entails the transfer of the right to subscribe to the shares to another party.
Unless the company's articles provide otherwise, the aforementioned offer shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of another person, and the notice of offer of rights issue to the shareholder shall include a statement of these renunciation rights.
e. Request for an increase in the number of shares.
A shareholder who has been assigned rights shares or who has acquired rights shares through renunciation may apply for fewer or more shares than the number of rights shares assigned to them. However, the board of directors retains discretion over the allocation of shares in excess of the rights shares.
f. Timelines for the Resolution of Rights Issues
The offer for rights issue must remain open for a minimum of 15 days, or such shorter period as the Board of Directors may specify. Offers for Rights should be kept open for a maximum of 30 days. If the offer is not accepted within the specified time period, it is deemed declined.
g. Issuance of rights shares to non-shareholders
After the rights issue offer period has expired, or earlier if the shareholder to whom the rights shares are offered declines the rights through a notice, the Board of Directors may dispose of unsubscribed rights shares in a manner that is not detrimental to the shareholders or the company. This means that the Board may allot unsubscribed rights shares to any third party of its choosing following the close of the rights issue. Additionally, there are no time limits specified in the Act or Rules for the board to allot the shares to a person other than an existing shareholder.
h. Dilution of Existing Shareholders' Positions
When a company issues additional shares, whether through a rights issue or otherwise, the shareholding percentages of existing shareholders are altered, unless all existing shareholders subscribe for the entire number of rights shares.
Dilution of shareholdings refers to changes in the shareholding percentages of existing shareholders as a result of excessive subscriptions or allocations to third parties, either through renunciation or the exercise of Board powers.
Process for Issuing Rights to Shares
1.Board of Directors Meeting:
The Company's Board of Directors must decide the following at its meeting:
- Issuance of additional shares to existing shareholders on a rights basis
- The ratio at which Rights shares are offered for sale.
- The price at which shares will be issued.
- Deadlines for the commencement/closure of the rights issue.
2. Offer Letter for Rights Issue
The company must first send a Letter of Offer to its shareholders. The shareholders should be notified of the share issue and given the option to accept the shares offered to them.
The letter of offer should be sent to all shareholders via registered mail, overnight delivery, or electronic transmission at least three days prior to the issue's opening.
The notice must specify the number of shares being offered.
3. Receipt of money from Share subscriptions
The shareholders who accepted the offer must submit the application money with their acceptance application.
4. Share Allotment
Following the close of the offer period for the rights issue, the Board of Directors shall allot the shares to shareholders who accepted the offer for the rights issue.
5. Submitting an Allotment Return (Form PAS-3) to the Registrar of Companies (ROC)
Following the allotment of shares, the company must file a Return of Allotment (Form PAS-3) with the Registrar of Companies (ROC) within 30 days of the date of allotment of shares certified by a Company Secretary in Practice / Chartered Accountant in Practice / or Cost Accountant in Practice, along with the appliance filing fee.
The form PAS-3 shall be accompanied by a certified true copy of the resolution and a list of allottees.
If the Return of Allotment is not filed within 30 days of the allotment date, an additional filing fee will be assessed.
6. Share certificate issuance
Within two months of the date of allotment of the shares, the company must issue Share Certificates to each allottee of the Rights Issue.
The Share Certificates in Form No. SH-1 and the Certificate must include the name of the person to whom it is issued, his folio number and the number of shares, as well as the certificate's distinctive number and the amount paid on those shares.
The Company's Share Certificates must be stamped in accordance with the applicable State Stamp Act and Stamp Rules. State-by-state stamp duty on share certificates varies. Non-payment of stamp duty on share certificates renders them null and void.
If the Company fails to deliver the share certificates within the prescribed period, the company shall be fined between Rs.25,000.00 and Rs.5,00,000.00, and each officer who fails to do so shall be fined between Rs.10,000.00 and Rs.1,00,000.00.
Want Your Company to Issue Shares?
Contact us to learn more about how we can assist you with your company's rights issue.
