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We all know what is a rights issue and how to make it. But how sure are we about the details in it? Is there any restriction on time gap between two rights issue in a company? What does Companies Act Says and what does SEBI ICDR says? How each type of company can offer rights issue? This is what we are going to discuss in this edition.

This edition, we will be discussing about new Incorporation procedure and Highlights on Financial Budget, 2018 along with our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI, IT and GST.

 Saranya Deivasigamani,
CEO

All About Rights Issue

A rights issue is an offer of shares to the existing shareholders of the Company in proportion to their shareholding. The rights issue is governed by Section 62 of the Companies Act, 2013 and SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

According to Section 62 of the Companies Act, 2013, (1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered—

(a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:—

(i) the offer shall 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;

(ii) 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/her or any of them in favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right;

(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he/she declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company.

The law has not restricted any Companies from issuing rights issue including One Person Company (OPC). However it is implied that an OPC can offer the rights issue only to the sole member.

When a listed public limited company offer a rights issue it should follow SEBI ICDR, 2009, where the aggregate value of specified securities offered is fifty lakh rupees or more.

The Companies which was listed on recognized stock exchange having nationwide trading terminals for a period of at least 3 years immediately preceding the reference date shall opt for Fast Track Issue of rights issue if its average market capitalization of public shareholding is at least 250 crore rupees.

Common Conditions for rights issue as per ICDR:

No issuer shall make a rights issue of specified securities:

a) if the issuer, any of its promoters, promoter group or directors or persons in control of the issuer are debarred from accessing the capital market by the Board;

b) if any of the promoters, directors or persons in control of the issuer was or also is a promoter, director or person in control of any other company which is debarred from accessing the capital market under any order or directions made by the Board;

c) unless it has made an application to one or more recognised stock exchanges for listing of specified securities on such stock exchanges and has chosen one of them as the designated stock exchange:

Provided that in case of an initial public offer, the issuer shall make an application for listing of the specified securities in at least one recognised stock exchange having nationwide trading terminals;

d) unless it has entered into an agreement with a depository for dematerialisation of specified securities already issued or proposed to be issued;

e) unless all existing partly paid-up equity shares of the issuer have either been fully paid up or forfeited;

f) unless firm arrangements of finance through verifiable means towards seventy five per cent. of the stated means of finance, excluding the amount to be raised through the proposed public issue or rights issue or through existing identifiable internal accruals, have been made.

Warrants may be issued along with rights issue of specified securities subject to the following:

a) the tenure of such warrants shall not exceed 18 months from their date of allotment in the public/rights issue;

b) not more than one warrant shall be attached to one specified security

c) the price or conversion formula of the warrants shall be determined upfront and at least 25% of the consideration amount shall also be received upfront;

d) in case the warrant holder does not exercise the option to take equity shares against any of the warrants held by him, the consideration paid in respect of such warrant shall be forfeited by the issuer.]

The amount for general corporate purposes, as mentioned in objects of the issue in the draft offer document filed with the Board, shall not exceed twenty five per cent of the amount raised by the issuer by issuance of specified securities.

No issuer shall make, (a) a public issue of equity securities, if the issuer or any of its promoters or directors is a wilful defaulter; or (b) a public issue of convertible debt instruments if,

(i) the issuer or any of its promoters or directors is a wilful defaulter, or

(ii) it is in default of payment of interest or repayment of principal amount in respect of debt instruments issued by it to the public, if any, for a period of more than six months.

An issuer making a rights issue of specified securities, shall make disclosures as specified in Part G of Schedule VIII, in the offer document and abridged letter of offer, if the issuer or any of its promoters or directors is a wilful defaulter.

In case of a rights issue of specified securities referred to in sub-regulation (6), the promoters or promoter group of the issuer, shall not renounce their rights except to the extent of renunciation within the promoter group.

Procedure to make a rights issue:

i. Convene a Board Meeting offering the rights issue, its terms, conditions and offer details. Pass a resolution for approving “Letter of Offer” or “Offer Document”. The offer letter shall include right of renunciation also.

ii. In case of Listed Company—appoint one or more merchant banker with at least one of whom shall be a lead merchant banker. Perform due diligence, issue newspaper advertisement in English and regional language newspapers.

iii. File offer document with the Board at least 30 days prior to registering the prospectus, red herring prospectus or shelf prospectus and receive observation and modifications.

iv. Dispatch Letter of Offer, Offer Document and other issue material including forms for ASBA to the shareholders, stock exchange, syndicate members as the case maybe.

v. Open the offer for a period not less than 15 days and not exceeding 30 days from the date of offer.

vi. On expiry of offer period, receive acceptance, renunciations, rejections of rights from the shareholders. If no response were received from the shareholders on expiry of 30 days, consider the offer to be rejected by such shareholder.

vii. Convene a Board Meeting approving the rights issue, detailing acceptance, renunciation and rejection of offer. Pass a resolution for approving the rights issue.

viii. File e-Form MGT-14 within 30 days of Board Meeting.

ix. File e-Form PAS-3 within 30 days of Allotment of Shares.

Restriction on further capital issue—as per ICDR:

No issuer shall make any further issue of specified securities in any manner whether by way of public issue, rights issue, preferential issue, qualified institutions placement, issue of bonus shares or otherwise:

(a) in case of a fast track issue, during the period between the date of registering the red herring prospectus (in case of a book built issue) or prospectus (in case of a fixed price issue) with the ROC or filing the letter of offer with the designated stock exchange and the listing of the specified securities offered through the offer document or refund of application moneys; or

(b) in case of other issues, during the period between the date of filing the draft offer document with the Board and the listing of the specified securities offered through the offer document or refund of application moneys; unless full disclosures regarding the total number of specified securities and amount proposed to be raised from such further issue are made in such draft offer document or offer document, as the case may be.

Nowhere in the act specifies any time limit within 2 rights issue or public issue unless the restrictions detailed above.

Legal Term

Indictment

Noun: a formal charge or accusation of a serious crime.

MCA Updates

• Forms revised recently are—INC-28, AOC-4, IEPF-1, SPICe, CODS 2018, CRL-1, DIR-3, DPT-3, MGT-6, MGT-15, MGT-14, ADT-1, ADT-2, SH-7 and URC-1 .
• Chapter IX, Section 129 shall not apply to the companies engaged in defence production to the extent of application of relevant Accounting Standard on segment reporting.

SEBI Updates

• Revision of limits relating to requirement of underlying exposure for currency derivatives contracts.
• Separate limit of Interest Rate Futures (IRFs) for Foreign Portfolio Investors (FPIs).
• Manner of Achieving Minimum Public Shareholding.
• Easing of Access Norms for investment by FPIs.
• Compensation to Retail Individual Investors (RIIs) in an IPO.

RBI Updates

• Discontinuance of Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) for Trade Credits.
• Hedging of Commodity Price Risk and Freight Risk in Overseas Markets (Reserve Bank) Directions.
• Separate limit of Interest Rate Futures (IRFs) for Foreign Portfolio Investors (FPIs).
• Risk Management and Inter-bank Dealings: Revised guidelines relating to participation of a person resident in India and Foreign Portfolio Investor (FPI) in the Exchange Traded Currency Derivatives (ETCD) Market.
• Ombudsman Scheme for Non-Banking Financial Companies, 2018.

Income Tax Updates

• The substituted Form 10A – Application for registration of charitable or religious trust or institution etc. is now available for e-Filing.

GST Updates

• New version of GSTR-4 offline tool is now available.
• Advisory to Taxpayers on Improved GSTR-3B Return Filing Process. And for filing Table 6A of GSTR-1 and return on GST Portal