Further issue of Shares and Right issue | Company Law - CLAT PG PDF Download

Rights Issue Explained

• A rights issue involves offering shares directly to all existing shareholders in proportion to their current holdings.
• The company sets a deadline for shareholders to purchase these shares.
• Companies opt for rights issues to raise funds for various purposes, such as expansion, acquisitions, or debt repayment.

Section 62 of the Companies Act, 2013

• Section 62 of the Companies Act, 2013 addresses the concept of "further issue of capital" and establishes the principle of pre-emptive rights for shareholders.
• Pre-emptive rights give existing shareholders the opportunity to subscribe to new shares before they are offered to others.

Applicability of Section 62

• The provisions of Section 62 are mandatory for all types of companies, including private, public, listed, and unlisted companies.

Relevant Provisions of Companies Act, 2013

Section 62(1): Offer of Further Shares

• When a company with share capital wants to increase its subscribed capital by issuing more shares, these shares must be offered to existing equity shareholders first.
• The offer should be made in proportion to their current shareholding and sent through a letter of offer.

Key Conditions:

• The offer must specify the number of shares and set a response time of at least 15 days but not more than 30 days.
• The offer includes the right for shareholders to renounce the shares in favor of someone else.
• If the offer is not accepted within the specified time, or if the shareholder declines earlier, the Board of Directors can dispose of the shares in a way that is not disadvantageous to shareholders or the company.

Procedure for Allotment of Shares on Right Issue Basis

The process for allotting shares on a right issue basis involves several steps to ensure compliance with legal requirements and proper communication with shareholders. Here’s a simplified breakdown of the procedure:

1. Board Meeting Preparation

• Issue a written notice to every Director at least seven days before convening the Board meeting, as per Section 173(3) of the Companies Act.

2. Board Meeting and Resolution

• Hold the Board meeting as scheduled.
• Pass a Board resolution to approve the Letter of Offer for the rights issue. Ensure that the offer letter includes the right of renunciation.

3. Dispatch of Letter of Offer

• Send the Letter of Offer to all existing shareholders via registered post, speed post, or electronic mode. This should be done at least three days before the opening of the issue.

4. Receipt of Responses

• Collect acceptances, renunciations, and rejections of rights from shareholders.

5. Second Board Meeting

• Issue a written notice to every Director at least seven days before convening the second Board meeting.
• Hold the second Board meeting.
• Pass a Board resolution to approve the allotment and issue of shares.

6. Filing Requirements

• File E-form MGT-14 within 30 days of the issue of securities.
• File a return of allotment in E-Form PAS-3 with the Registrar within 30 days of the allotment of shares.

Nanalal Zaver v. Bombay Life Assurance Co. Ltd.

AIR 1950 SC 172: (1950) 20 Com Cases 179: Section 81 (Corresponding to section 62 of the Companies Act, 2013) is intended to cover cases where the directors decide to increase the capital by issuing further shares within the authorised limit, because it is within that limit that the directors can decide to issue further shares, unless, of course, they are precluded from doing that by the Articles of Association of the company. Accordingly, the section becomes applicable only when the directors decide to increase the capital within the authorised limit, by issue of further shares.

Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd.

• (1981) 51 Com Cases 743 at 816: AIR 1981 SC 1298: (1982) 1 Comp LJ1. The Court pointed out that the directors of a company must exercise their powers for the benefit of the company. The directors are in a fiduciary position and if they do not exercise powers for the benefit of the company but simply and solely for personal aggrandizement and to the detriment of the company, the court will interfere and prevent the directors from doing so.
• (B) See Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. The power to issue shares need not be used only when there is a need to raise additional capital. The power can be used to create a sufficient number of shareholders to enable a company to exercise statutory powers or to enable it to comply with statutory requirements.
• The Department of Company Affairs, now Ministry of Corporate Affairs has clarified that ‘one year’ specified in the section is to be counted from the date on which the company has allotted any share for the first time

Balkrishan Gupta v. Swadeshi Polytex Ltd.

• (1985) 58 Com Cases 563: AIR 1985 SC 520]. Although the term ‘holders of the equity shares’ is used in Sub-section (l)(a) and ‘members’ in Subsection (lA)(b) of Section 81 (Corresponding to section 62 of the Companies Act, 2013), the two terms are synonymous and mean persons whose names are entered in the register of members.