Background: In accordance with Section 62(1) of the Companies Act of 2013, if the company decides to issue new shares, those shares must be made available to existing shareholders in proportion to the number of equity stockholders.

Offering members shares proportional to their shareholding is referred to as a “right issue.” Naturally, the goal is to ensure that shares are distributed fairly, and the distribution of voting rights is unaffected by the issuance of new shares.

There is only one pre-emptive right: It is now well established that only one preemptive offer(which should be “either”)is to be accepted or rejected at all. In regards to those shares that were not accepted, the existing shareholders will not receive any additional preemptive rights. Any or all of these first rights can be waived or altered.

The Companies Act of 1956 did not require a private company to make a right offer. Even though there was no provision in the past, it was determined that the issue cannot be made with oblique motives and must be genuine.

STEP PROCEDURE OF RIGHT ISSUE OF SHARES 

STEP-1 

Company will decide the cutoff date. 

Company wills Prepare Draft Offer of Letter. 

STEP-II 

Call Meeting of Board Director: 

Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting. 

Attach Agenda of Board Meeting along with Notice. 

Attach Notes of Agenda along with Agenda. 

STEP-III

Hold the Board Meeting: 

Check the quorum of Board Meeting. 

Identify the Shareholders to whom you will issue shares. 

Pass Board Resolution for approval of offer letter. 

Authorize a director of company to issue Letter of Offer. 

Letter of offer shall be dispatched through registered post or speed post or through electronic mode to all the existing share holders. 

STEP-IV 

Offer will be open at least after 3 days of issue of letter of offer. 

Offer will be open for minimum 15 days or maximum for 30 days. 

STEP-V 

File Form with Registrar: 

File MGT-14 with Registrar within 30 days of passing of Board Resolution. 

Attachments: 

CTC of Board Resolution for issue of letter of offer. 

STEP-VI

Receive the Money from the Shareholders. 

STEP-VII 

Call Board Meeting after receiving of Share application money. 

Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting. [Section-173(3)] 

Attach Agenda of Board Meeting along with Notice. 

Attach Notes of Agenda along with Agenda. 

STEP-VIII 

Hold the Board Meeting: 

Check the quorum of Board Meeting. 

Present List of Allottes before the Meeting. 

Pass Board Resolution for allotment of shares (within 60 days of receiving of money). 

STEP-IX 

File form with ROC: 

File PAS-3 with Registrar of Company. 

ATTACHMENTS: 

List of Allottes. 

Board Resolution for allotment of Shares. 

STEP-XI 

Issue Share Certificate: 

Pass Resolution for issue of Share Certificate in Board Meeting. 

Authorize to two directors and a authorize person to sign share certificate. 

Issue Share Certificate in Form- SH-1 (As per Section-56 with in 2 (two) months from the date of allotment of shares.

PROCESS OF RENUNCIATION OF RIGHT OF SHARES

1. PROCESS OF RENUNCIATION OF SHARES BY THE SHAREHOLDER:

This procedure can be referred to as “Issue of share to outsiders under Right issue of Shares.”

PROCESS ON PART OF SHAREHOLDER:

1. Under the Right Issue of Shares, the company will make an offer to its current shareholders.
2. A shareholder may renounce the offer of additional shares in favor of any other person, even if they are not members of the Company, if he or she does not wish to accept them. This is the way by which Organization can give offers to outcasts under Right issue of shares}.
3. This right of renunciation must be granted: unless the company’s articles of incorporation state otherwise. The shareholder must be informed of the right in the letter of offer. 4. Recall from Shareholder: A shareholder who may be short of funds can renounce his right to a specified number of shares by “Selling” his right to subscriber, which typically occurs at a price lower than the prevalent market price. 
4. Make use of both rights: He can give up some of his rights and keep the rest. This is acceptable.

PROCESS ON PART OF COMPANY:

1. In the Letter of Offer, the company will make an offer of “Renunciation” to its current shareholders.
2. A letter of renunciation in favor of renunciation must be submitted by the shareholder to the company if the shareholder wishes to renounce their shares.

3.Company will get an acknowledgment letter and offer application cash from the deny.

4. Following the end of the offer period, the company will hold a Board Meeting and distribute renounce shares.
5. PROCESS OF RENUNCIATION OF RIGHT OF SHARES BY THE BOARD:

PROCESS ON PART OF COMPANY:

1. In the Letter of Offer, the company will make an offer of “Renunciation” to its current shareholders.

2.If Investor don’t buy into the ‘right issue’. Even renoncing their right to a third person is not possible.

3. In such a scenario, the Board of Directors is free to dispose of the unsubscribed shares in the manner that they consider to be most advantageous to the business.

4.Board of Chiefs can allocate the UN-buy in piece of offers to some other individual.

5. Good Method: Good businesses typically ask shareholders to apply for additional shares in addition to those already allotted to them as a matter of right.

6.The un-bought in segment is distributed to the individuals who have applied for extra offers on an evenhanded premise and equilibrium sum is discounted.

ISSUE OF SHARES UNDER CASH CONSIDERATION

Que: Whether a business is permitted to issue shares for cash consideration?

Ans: Yes, per the Companies Act of 2013

Right Issue of Shares: For right issue of shares Section- 62 of Companies Act, 2013 will apply.

According to my understanding: Companies Act, 2013 doesn’t restrict to issue shares on cash. No method is provided in Companies Act, 2013 u/s 62 for issue of shares. Like mentioned in Private Placement of Shares Section- 42. 

In Section- 42 of Private Placement of Shares its mentioned that company will receive money from the subscriber in the Bank account of Company. That’s mean subscriber have to make payment through Banking channel not by cash. But such restriction is not given under Section – 62 for right issue of shares.

CONVERSION OF LOAN INTO EQUITY

Question: Can a company convert loans into share capital of company under companies act 2013 (except loan taken and debenture issued to government company).

Solution: Section 62 sub section 3 of Companies Act, 2013 

As per The Section: 

Provisions of Section- 62 doesn’t required to follow in this situation 

Special Resolution required filing at the time of issue of Debenture and Loan.

Observation:

1. At the time of accepting a loan and issuing debentures, a special resolution must be passed by the company to conditionally convert the loan and debentures into shares in the future. Stipulation of subsection 3 of Area 62}.
2. In order to submit a Special Resolution to the ROC, you are required to fill out form MGT-14.
3. The Debenture and Loan ought to have terms attached to them so that they can later be converted into capital.
4. No need to follow the procedure outlined in Section 62 for the issuance of shares. Section 62, subsection 3: “In this circumstance, there is no need to issue an Offer Letter.”

Q1. Is it possible for a company that took out a loan in the past under the old Companies Act of 1956 to use that loan as capital?

Solu: He can, indeed. Because there are no such requirements under the Companies Act of 1956. However, the condition for converting the loan into equity in the future was mentioned in an agreement.

Q2. Is it possible for a business to turn a loan it received prior to the Companies Act of 2013 into capital?

Solu: He can, indeed. If he passed a Special Resolution when he raised money and the company passed a Special Resolution when it received money, he can turn the loan into the company’s capital.

Following things are required: 

1. Special Resolution at the time of raising of Loan 
2. Filed MGT-14 with ROC for Special Resolution. 
3. Pass a Board Resolution at the time of conversion of same into Share Capital. 
4. File form MGT-14 for issue of shares 
5. File form PAS-3 for allotment of shares.

IMPORTANT MATTERS RELATING TO RIGHT ISSUE OF SHARES:

• Prospectus not required in right offer even with right of renunciation:

Section 23(2) of the Companies Act, 2013 clearly states that issue of prospectus is not necessary in right issue whether with or without right of renouncement. 

Department has also clarified vide letter No. 8/81/56-PR dated 04.11.157 that issue of rights share is a ‘domestic concern’ and hence issue or registration of prospectus is not necessary. 

Section 62(1)(a) of the Companies Act, 2013 states that company making right issue should send a letter of offer.

 No prospectus is required for ‘right issue’ to existing members, even if the members have right to renounce the right to a third person, who may or may not be a member.

• Fraction right in case of Right Issue of Shares: 

Sometimes, right issue may result in fractional right. 

The offer of further shares should be offered to holders of equity shares in proportion to the existing paid up capital, as nearly as circumstances admit. Thus, legally, such fractional right can be ignored. However, this becomes unfair, particularity to small shareholder.

TABLE FOR RIGHT ISSUE OF SHARES UNDER COMPANIES ACT- 2013

Disclaimer: The materials provided herein are for informational purposes only and do not constitute legal, financial, or professional advice. Consult relevant laws and experts before acting on this information. Neither the author nor K M GATECHA & CO LLP is liable for any inaccuracies or omissions. This material is purely educational and not an advertisement or solicitation.