Rights Issue

(A cost-effective route to raise capital from existing shareholders)

Overview

A Rights Issue is a method by which a company offers additional shares to its existing shareholders in proportion to their current shareholding. It provides a right—but not an obligation—to buy these shares at a discounted price within a specified time window. This process enables companies to raise additional capital without diluting ownership significantly or seeking external investors.

Rights Issues are widely used by both listed and unlisted companies to strengthen capital bases, fund expansions, repay debt, or improve working capital. It is considered one of the most transparent and shareholder-friendly ways to raise capital, as it preserves existing ownership structures while allowing shareholders to participate in the company’s growth.

In the Indian regulatory environment, Rights Issues are governed by well-defined frameworks under the Companies Act and SEBI regulations for listed companies.

Key Benefits

·       Capital Infusion Without External Dilution: Existing shareholders are given priority before offering shares to outsiders.

·       Preservation of Ownership: Shareholders can maintain their stake by subscribing to the issue.

·       Flexible Pricing: Shares are typically offered at a discount, making it attractive to current shareholders.

·       No Shareholder Approval Required (in most cases): Unlike preferential issues, rights issues often don’t require special resolutions.

·       Quicker Execution: Especially for listed companies using the fast-track route.

·       Ideal for Debt Reduction or Business Expansion: Provides access to funds for critical business needs without incurring interest obligations.

Applicable Laws & Regulatory Framework

Rights Issues in India are governed by:

·       Companies Act, 2013 – Section 62(1)(a) and Rule 13 of Companies (Share Capital and Debentures) Rules, 2014

·       SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR) – applicable to listed companies

·       Income Tax Act, 1961 – tax implications on sale of rights or gains from subscription

·       FEMA Regulations – in case of NRIs or foreign shareholders

·       Stock Exchange Listing Obligations – for disclosures and timelines (for listed companies)

Eligibility / Ideal For

Rights Issues are well-suited for:

·       Private and Public companies that want to raise equity capital while rewarding existing shareholders

·       Listed companies looking for a cost-efficient capital raise option with minimum dilution

·       Startups or family-owned businesses that need expansion funds but want to retain promoter control

·       Debt-ridden companies looking to raise funds to reduce liabilities

Procedure

1.     Board Approval

The Board of Directors approves the rights issue along with the ratio, price, record date, and draft letter of offer.

2.     Offer Document Preparation

A letter of offer containing terms, conditions, eligibility, and procedures is prepared. In listed companies, it is filed with SEBI and stock exchanges.

3.     Fixing of Record Date

A cut-off date is declared to determine eligible shareholders entitled to receive rights.

4.     Dispatch of Offer Letter

Shareholders are informed of their entitlements and offered rights to subscribe or renounce.

5.     Subscription Period

Shareholders may:

o   Subscribe fully or partially

o   Renounce rights in favour of others

o   Ignore the offer

6.     Allotment of Shares

After the subscription closes, shares are allotted to applicants and excess applications, if any, are considered.

7.     Filing and Compliance

Allotment return (Form PAS-3) is filed with ROC. In listed companies, disclosures to stock exchanges and SEBI are mandatory.

Timelines

The timeline for Rights Issues varies based on whether the company is listed or unlisted:

·       Unlisted Companies: Approx. 30 to 45 days from Board resolution to share allotment

·       Listed Companies: Around 31 to 60 days, depending on SEBI review and compliance

Fast-track rights issues (for eligible listed companies) significantly shorten timelines.

How LTC Helps

Law to Corporate offers complete legal and procedural support in planning and executing Rights Issues, including:

·       Advising on feasibility, valuation, and share pricing

·       Drafting of Board and shareholder resolutions

·       Preparation and vetting of offer letters and application forms

·       Handling ROC, SEBI, and exchange filings

·       Coordination with merchant bankers and legal auditors (for listed companies)

·       Managing the entire rights issue lifecycle from record date to allotment

We ensure that your Rights Issue is conducted in a timely, compliant, and strategically sound manner—maximizing capital infusion while safeguarding shareholder interests.