Right Issue Process and Compliance Requirements under the Companies Act, 2013

A Right Issue is a method for companies to raise additional capital by offering shares to their existing shareholders in proportion to their current holdings. This process is governed by the Companies Act, 2013, with specific compliance requirements outlined in Sections 62 and 179, as well as related Secretarial Standards.

1. Notice of Board Meeting

As per Section 179(3) of the Companies Act, 2013, the Board must be notified of an upcoming meeting for Right Issue approval at least 7 days in advance. The notice should explicitly detail the agenda, allowing the Board to deliberate effectively.

2. Conducting the Board Meeting

The Board Meeting must be conducted in alignment with Secretarial Standards-1 (SS-1) to ensure procedural and governance compliance. These standards dictate how the meeting is to be organized and recorded, promoting transparency.

3. Board Approval for Right Issue

A Board Resolution is sufficient for the initiation of a Right Issue, bypassing the need for a Special Resolution by shareholders. This allows the company to offer additional shares to existing shareholders proportionate to their shareholdings.

4. Preparation of the Letter of Offer and Application Form

Upon passing the Board Resolution, the company can issue the Letter of Offer to shareholders. As required by Section 62(2) of the Companies Act, 2013, this letter must be sent to shareholders through registered post, speed post, or electronic means at least 3 days before the offer period begins.

5. Subscription Period for Acceptance

Shareholders are allotted a response period ranging from 15 to 30 days to accept or renounce the offer. In a Private Company, this period can be reduced to fewer than 7 days if at least 90% of shareholders agree in writing.

6. Filing Form MGT-1 (Applicable for Public Companies)

Public Companies must file Form MGT-1 with the Registrar of Companies (ROC) within 30 days of passing the Board Resolution. This filing must include a certified copy of the resolution, ensuring that regulatory bodies are informed.

7. Acceptance and Processing of Application Money

Application money can be received in cash or converted from an existing loan (if permitted by the loan agreement). A Special Resolution from shareholders is necessary to approve this conversion, ensuring transparency and adherence to loan terms.

8. Second Board Meeting for Allotment of Shares

A second Board Meeting is scheduled to approve the share allotment, with a notice provided to shareholders at least 7 days before. A quorum is required to ensure validity, and a Board Resolution is passed to confirm the allotment, which must occur within 60 days to avoid interest liability of 12% per annum on shareholder deposits.

9. Execution of Share Allotment

After the Board Resolution, shares are allotted to shareholders who accepted the offer or renounced it. The entire allotment must be completed within 60 days of the application receipt to avoid the 12% per annum interest liability on the funds.

10. Mandatory ROC Filings

The company must file Form PAS-3 with the ROC within 30 days of share allotment, accompanied by a certified true copy of the Board Resolution and a list of allottees. Additionally, Form MGT-14 must be filed for share issuance and allotment compliance, ensuring regulatory adherence.

11. Issuance of Share Certificates

Following the PAS-3 filing, Share Certificates in Form SH-1 are issued within 2 months of allotment. The certificates must bear the signatures of at least two directors, providing shareholders with legally valid proof of their holdings.

12. Loan-to-Equity Conversion Conditions

For loans to be converted into equity, explicit terms must be included in the loan agreement, and shareholder approval via a General Meeting resolution is required. This ensures clear guidelines and shareholder protection.

13. Additional Compliance for Offering Right Issue to Non-Members

If shares are offered to individuals other than current shareholders, additional conditions apply:

• A valuation report from a registered valuer is required.
• A Special Resolution (SR) must be passed in the General Meeting.
• Form MGT-14 must be filed within 30 days of the SR, although private companies are exempt.

14. Allotment at Book Value for Companies with Positive Net Worth

For companies with a positive net worth, shares should be allotted at the book value if it exceeds the face value. Issuing shares at face value when book value is higher may invoke tax implications under Section 56 of the Income Tax Act, 1961, where shareholders could be subject to capital gains tax based on holding duration.

Conclusion

Conducting a Right Issue in compliance with the Companies Act, 2013 involves a series of structured steps, including Board approval, notice requirements, shareholder communication, regulatory filings, and financial safeguards. Adhering to these ensures effective governance, protects shareholder interests, and maintains transparency throughout the capital-raising process.

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Article Compiled by:-

~Neel Lakhtariya

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.