Search This Blog

October 28, 2013

Need of Right Issue

Rights issue is a method by which companies  raises their share capital by offering new shares  to their existing equity shareholders, thus new  shares issued by a company must first be offered  to the existing shareholders in proportion to their  holding of old shares, i.e. on pro rata basis.

Sometimes companies come out with a batch of new shares and may choose not go to the public (like IPO). Company may just approach only the existing shareholders (those who own the shares of that company). These shares are called a rights issue. In other words, only the existing shareholders have a right to buy these shares.

Section 81 contains provisions on "Further issue of capital", and provide a statutory right of existing shareholders to have offered the new shares. Thus, this section gives a Company's existing equity shareholders a pre-emptive right to get the further shares

Whereas Section 81(1A) provides for relaxation from Section 81(1).It provides that further shares may be offered to any person other than existing shareholders. 

Unlike Bonus shares, you have to pay for the these shares  acquired.

The shareholders, who receive offers for  subscribing to the rights shares are entitled to  renounce (i.e. surrender to someone else of their  rights to new shares) it in favour of any body  else if they do not want to subscribe to such a  rights issue. It is one of the statutory right of the  shareholder.

The person to whom the shares are offered has to  fill up the renunciation form (usually attached  with the letter of offer) in favour of the person to  whom he wishes to renounce his rights.

This facility benefits both the shareholder as well  as the outsider, since the shareholder can sell the  benefit which accrues to him by the way of rights  issue in which he is not interested at this  moment, and the outsider is benefited since he  could purchase the shares of that company at the  face value of the shares rather than at the market  price.

No comments:

Post a Comment