Right issue or Bonus issue of Shares

Governing Section:
SECTION 62 of Companies Act 2013

The Provisions of Section 62 of Companies Act, 2013 bind all Private companies, public companies, listed and unlisted companies.

Right Issue’ means offer of shares to existing members in proportion to their existing shareholding. The object is, of course, to ensure equitable distribution of Shares and the proportion of voting rights is not affected by issue of Fresh shares.

A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. This type of issue gives existing shareholders securities called rights. With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date.

Conditions for the Right Share

a. Unless the articles of the company otherwise provide, the notice of offer shall contain a statement of right to renounce.

b. Check if the offer specifies the number of shares offered and confirms that the issue is open for at least 15 days and is not kept open for more than 30 days

c. Check if the clause pertaining to non acceptance of offer within a specified time, would be deemed to be denial of offer is put in the offer letter

d. Check if the offer includes a right to renounce the shares in favour of any other person

e. Check if the offer states that, in case the shares are declined after the expiry of the time mentioned in the notice or by an earlier intimation from the person to whom the notice was given, the board of directors may dispose of the shares in a manner not disadvantageous to the shareholders and the company.

Procedure for Right Issue

The right issue is one of the easiest ways to increase the subscribed capital since it does not involve issue like valuation of shares, passing of special resolution etc.; however, the only limitation is that it can be offered only to existing equity shares.

1.Prepare the list of existing shareholders, along with details of shares, and ascertain the number of shares which can be received by them on the right issue basis.

2.Prepare draft share application form, draft offer letter for right issue and the letter of renunciation.

3.Prepare notice of board meeting along with draft resolution(s) to be passed in the board meeting.
Send notice of board meeting to all the directors

*at least 7 days before the date of board meeting or

*in such manner as prescribed under section 173(3) of the Companies Act, 2013 and clause 1 of the Secretarial Standard-1.

4.Convene board meeting to pass the following resolutions:

*Approving letter of offer and application form.
*Approving issuance of Shares through Right Issue to existing shareholders.
*To fix the record date, the ratio of shares and the price of shares to be issued.
*Authorisation to Director/Company Secretary to sign the documents.

5.Prepare draft minutes of the board meeting and circulate, within a period of fifteen days from the date of conclusion of that meeting, to all directors, by hand/speed post/registered post/courier/e-mail or by any recognised electronic means, for their comment(s).

6.File e-FormMGT-14 (in case of public company as private companies are exempted to file board resolution in respect of issue of shares through right issue) with the Registrar of Companies within 30 days of passing of board resolution.

7.Send or dispatch letter of offer to all existing shareholders through registered post or speed post or electronic mode or courier or any other mode having proof of delivery at least 3 days before opening of issue. The letter of offer shall specify the number of shares offered and offer shall be open for a minimum period of 15 days to maximum period of 30 days. {The period of 3 days and 15 to 30 days may be shorter if 90 % shareholders have given their consent for shorter notice period in case of private limited company}.

8.After receiving acceptance, renunciation or rejection of right from the shareholders, along with share application money, call another board meeting by sending board meeting notice at least 7 days before the date of board meeting.

9.Ensure that securities are to be allotted within 60 days from the date of receipt of the application money and if the company fails to allot securities, has to repay the application money to the subscribers within 15 days from the date of completion of 60 days and in case the company fails to repay the application money within the aforesaid period, the company is liable to repay application money along with interest at the rate of 12% p.a. from the expiry of the 60th day.

10.Prepare list of shareholders:
*who have renounced their shares
*who have not subscribed or denied the offer of right issue.
*who have subscribed shares in excess of the entitlement under right issue.

11.Convene board meeting within 60 days of receipt of application money to pass the following resolution:
*Allotment of shares to the persons applied for shares.
*Authorisation for issue share certificates.
*Authorisation for making entries in Register of Members.

12.Prepare draft minutes of the board meeting and circulate, within a period of fifteen days from the date of conclusion of that meeting, to all directors, by hand/speed post/registered post/courier/e-mail or by any recognised electronic means, for their comment(s).

13.Prepare list of allotees for filing with the Registrar of Companies.

14.File e-Form PAS-3 along with attachments with the Registrar of Companies within 30 days of allotment of shares.

15.Make necessary entries in the register of members within seven days after passing of board resolution for allotment of shares.

Bonus Issue
Meaning of Bonus Share: A bonus share is a free share of stock given to exisiting shareholders in the Company, based upon the current shareholding of shareholders.

Although the total numbers of issued shared increases, but the ratio of numbers of shares held by each shareholder remains constant.

Legal Provisions related to Issue of Bonus Shares in Private Company
Section 63 of the Companies Act, 2013 contains provisions for issue of Bonus shares.
Rule 14 The Companies (Share Capital and Debentures) Rules, 2014.

Source of Funds for Issue of Bonus shares
1. Bonus Shares can be issued from:-

*Its free reserves

*The securities premium account; or

*The capital redemption reserve account.

2. No issue of bonus shares shall be made capitalizing reserves created by the revaluation of assets. (Company can’t issue Bonus Shares out of reserve create from revaluation of assets).

Procedure for Issue of Bonus Shares in Private Company

*Check and ensure that Article of Association contains points regarding the issue of Bonus shares, if not than alter the Article of Association first.

*Check and ensure that the Authorized share capital of the Company is sufficient for the issue of Bonus shares, if not than first increase Authorized share capital of the Company.

*Check and ensure that the sources out of which the bonus is to be made is sufficient.

*Call and conduct Board meeting and pass resolution for:

a) For Recommending Issue of Bonus shares.

b) For deciding the ratio of shares offering to the shareholders.

c) For Fixing the Date of Extra Ordinary General Meeting for seeking the consent of the members for issue of bonus shares.

*Call and conduct Extra-Ordinary General Meeting of shareholders for passing the resolution of issuing bonus shares.

*File MGT-14 with ROC within 30 days of passing resolution.

*Call and conduct Board meeting for allotment of shares.

*File PAS-3 with ROC.

*Issue of Share certificates.

*Making entry in the Register of members.