Are you a shareholder of a company? Ever wondered how companies raise additional funds? One of the ways they do this is through a process called a "Rights Issue." If you're unfamiliar with this term, don't worry - we're here to break down the ins and outs of the Rights Issue procedure as outlined by the Companies Act of 2013.
A Rights Issue is a method by which a company raises capital by offering existing shareholders the opportunity to purchase additional shares at a discounted price. This is a way for the company to raise funds without necessarily seeking new investors from the general public. Existing shareholders are given the "right" to subscribe to new shares in proportion to their existing shareholdings.
The process kicks off with the board of directors passing a resolution to approve the rights issue and set the terms, such as the number of shares to be issued, the issue price, and the ratio of shares to be offered to existing shareholders.
Once the terms are set, the company sends out an offer letter to all eligible shareholders. This letter details the number of shares they can subscribe to, the issue price, the time frame within which they can exercise their rights, and the payment method.
Shareholders are given a specific window, typically around 15-30 days, to decide whether they want to take up the offer. They can either subscribe to the additional shares or choose to let the opportunity pass.
Shareholders who wish to subscribe to the new shares must make the required payment as per the terms of the offer. This payment is usually lower than the prevailing market price, making it an attractive proposition for shareholders.
Once the subscription period closes, the company issues the new shares to the shareholders who subscribed. These new shares become a part of their portfolio.
If the company's shares are listed on a stock exchange, the new shares are usually listed shortly after the issue is complete. This allows shareholders to trade these shares on the exchange.
The company must also inform regulatory bodies, such as the Securities and Exchange Board of India (SEBI), about the rights issue.
Existing shareholders maintain their ownership stake since they have the first right to buy new shares.
Companies can raise capital relatively quickly compared to other methods.
The issue price is often lower than the market price, incentivizing shareholders to participate.
The Rights Issue procedure under the Companies Act of 2013 provides a structured and transparent way for companies to raise additional capital while giving existing shareholders the chance to expand their investment. It's a win-win situation where companies receive the funds they need for growth, and shareholders can take advantage of an opportunity to increase their ownership at a discounted rate.
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