Procedure for Right Issue of shares in private limited company as per companies act, 2013

Right Issue of Shares

As per Section 62(1)(a) of the Companies Act, 2013 if the Company decides to issue fresh shares, these should be offered to existing shareholders in proportion to the paid up share capital (paid up not authorised) and to existing persons who are holders of equity shares.

‘Right Issue’ means offering shares to existing members in proportion to their existing share holding. The object is, of course, to ensure equitable distribution of Shares and the proportion of voting rights is not affected by issue of Fresh shares (voting power and shareholding percentage does not get affected unless anyone to the Right Issue don't participate or renounce their rights in favour of others).

Procedure for issue of Right Shares:

1. First of all Company decides a cut-off date. The Shareholders as on a particular cut-off date are eligible to participate in the Rights Issue of the Company.

2. Check whether the rights issue results in increase of authorized capital.

3. If so call a board meeting to approve the notice of General meeting to pass necessary special resolutions at the general meeting to amend Memorandum/Articles of Association. In other case, convene and hold Board meeting & pass Board resolution for approval of Right Issue and offer letter.

Note: points to note that the offer letter in the Private Placement has been prescribed as PAS-4 but for Right Issue no such format, therefore one is free to use any format but it should contain certain material information. 

4. Convene the general Meeting and obtain shareholders’ approval through special Resolution. (Basically for right issue of shares, there is no requirement to pass Special Resolution, only Board resolution will suffice).

5. The offer should be made by notice, specifying the number of shares offered and limiting a time not being less than fifteen days 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.

If intention to decline is communicated to the Board during the offer period is open, then it is considered validly declined. If the shareholder wait for the offer period to end and he/she neither declined nor renounced the Right, then it will considered as deemed to have declined.

6. This notice shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to All the existing shareholders at least three days before the opening of the issue. It means that offer should be open at least 3 days after the issue of offer letter.

7. However, in case of private companies if 90% or more of members have given their consent in writing or in electronic mode, the lesser period than the specified period shall apply.[Exemption provided to private companies vide notification no. G.S.R. 464 (E)].

8. Unless the articles of the company otherwise provide, the offer aforesaid 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 any other person; and the notice shall contain a statement of this right.

9. Members can also decline to take part in the Right issue. This declination can take effect in following way:

a) after the expiry of the time specified in the notice; or

b) on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered.

10. The shares declined by the existing shareholder can be disposed off by the Board of Directors in such manner which is not disadvantageous to the shareholders and the company.

Note: here to note that act and rules are silent on the manner of disposing off shares, so ultimate decision authority is the Board of directors. They are free to decide that what would happen to these remaining shares but only one condition to comply that the manner of disposing off should not be disadvantageous to the company.

11. Receive the Subscription Money from the Shareholders.

Note: unlike private placement, separate bank account opening requirements is not specified in the Act, so any current account of the company can go for this. But, ideally a separate bank account should be opened to avoid any confusion regarding money subscription because different people would send money on different days and the Board may get confuse to track and identify which amount came from which person. This is a real experience that I am sharing.

12. Convene and Hold another Board meeting for passing Board resolution of Allotment of Shares. Allotment should be done within 60 days of receiving of subscription money.

13. Check the copy of form SH-7 & MGT-14 filed with ROC (only in the case of increasing in the authorised share capital).

14. Once the allotment is made, the company shall within 30 days of allotment, file with the Registrar a return of allotment in Form PAS-3 along with the fee.

15. Deliver the share certificates of allotted shares within a period of 2 months from the date of allotment.

16. Intimate the details of allotment of shares to the Depository immediately on allotment of such share.