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Rights Issue of Shares Research Team | Posted On Tuesday, April 14,2009, 04:47 PM

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Rights Issue of Shares



If, at any time after the termination of 2 Years from the date of incorporation of the company or after one year from the date of first allocation of shares, whichever is earlier, a public company limited by shares issues further shares within the limit of authorized capital, its directors must first offer such shares to the existing holders of equity shares in proportion to the capital paid up on their shares at the moment of further issue, this is commonly known as "Rights Issue of shares". The company must give notice each of the equity shareholders giving him the choice to purchase the shares offered to him. The shareholders must be informed of the number of shares he has the opportunity to buy. He must be given minimum 15 days to decide for exercising his option. The directors must state in the notice of the offer the fact that the shareholders also have the right to relinquish the offer in entire or part in favour of some other person; this is commonly known as "Renunciation of Rights".

If the shareholder does not notify the company of his decision to take the shares, it is deemed that he has declined the offer. In case where the rights shares are not taken by the shareholders, the directors of the company may dispose of the shares in the way they think fit.

A company may by special declaration in the general meeting decide that the directors need not offer the shares to the existing shareholders of the equity shares and that they may dispose them off in a way thought fit by them, this is known as "preferential offer of shares" where third parties or only certain shareholders are given shares in precedence over the other shareholders.

But, if a special resolution for preferential issue of shares is not passed but merely an ordinary declaration is passed, preferential issue of shares may be done provided sanction of the Central Government is obtained. The prices at which the preferential shares are to be obtainable are governed by the SEBI guidelines in case of listed companies. Such shares cannot be issued at a price which is less than the higher of the following :

  • The average of the weekly highs and lows of the closing prices of the shares on the stock exchange during 6 months preceding the date of issue ; or
  • The average of the weekly highs and lows of the closing prices of the shares on the stock exchange during 2 weeks preceding the date of issue

The above provisions of preferential allotment do not apply to change of loans or debentures in equity shares provided the terms of the loan or terms of issue of debentures give an option to convert such loans or debentures into shares of the company. Such stipulations and conditions must be accepted before the issue of debenture or rising of the loan by the Central Government or must be in compliance with the rules made by the Government for this purpose. The proposal must be approved by the special declaration passed by Company at the general meeting before the issue of debentures or raising of the loan. For this purpose the Central Government has framed the Public Companies (Terms of issue of debentures and rising of loans with opportunity to change such debentures or loan into equity shares) Rules, 1977.

The following is the broad gist of these rules :

  • The debenture or loan is raised or issued also through private subscription or through issue of the prospectus to the public.
  • The financial institutions specified for this reason either underwrite or subscribe to the entire or part of the issue of debentures or sanction the raising of loan.
  • Having regard to financial position of the company, the conditions of issue of debentures or terms of loan (eg rate of interest payable on debenture and loan the capital of the company, its liabilities and its profits during immediately preceding five years and the current market price of shares of the company), the conversion must be either at par and or at premium not exceeding 25 percent of the face value of the shares.

The provisions of rights and preferential issue do not apply in the following cases :

  • Increase in share capital by a private company.
  • Increase in share capital by a deemed public company.

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