Rights Issue by Way of Renunciation

Rights issue is a process of offering additional shares to the existing equity shareholders (“Shareholders”) of the Company at a pre-determined price which is generally lower than the market value of shares. The concept of a rights issue stands out as a significant mechanism for raising capital. One unique feature of a rights issue is providing the right to shareholders to renounce the shares offered to them in favour of any other person who may or may not be an existing shareholder of the Company. This article explores the process and implications of rights issue by way of renunciation under the Companies Act, 2013.

Overview

Rights issue helps companies raise additional capital while giving preference to current shareholders. The key points regarding a rights issue under the Companies Act, 2013, includes:

• Proportionate Allotment: Shares are offered to existing shareholders in proportion to their current holdings.
• Price: Typically, shares are offered at a price lower than the prevailing market price or at any price decided by the Board of Directors of the Company.
• Fixed Time Frame: Shareholders are given a specific period to exercise their rights (minimum 7 days to maximum 30 days).

Provisions for Renunciation:

The Companies Act, 2013 outlines the procedures for rights issue and renunciation.

Section 62 of the Companies Act, 2013 governs the rights issue and Section 62(a)(ii) permits the renunciation of these rights in favour of any other person.

Procedure for Renunciation

The process of renunciation involves several steps:

• Offer Letter: An offer letter is circulated to existing shareholders with details on the rights issue, including shares offered, price, terms, offer period, and options to accept or waive or renounce.
• Acceptance or Renunciation: Shareholders are given the option to either partially or wholly renounce their rights. To renounce their rights, shareholders must submit the renunciation form within the stipulated time. 

In case the shares are renounced to foreign investors, the Company will need a valuation report.

• Subscription by Renouncee: The new holder (renouncee) can subscribe to the offered shares by paying the requisite amount.
• Allotment: The Board allot the shares to the renouncee after receiving acceptance letter and payment.

Conclusion

The rights issue mechanism under the Companies Act, 2013, with its provision for renunciation, provides a balanced approach for companies to raise capital while offering flexibility to shareholders. By understanding and effectively utilizing these provisions, companies can enhance their financial strategies, and shareholders can make informed decisions to optimize their investment portfolios. The renunciation process, governed by clear legal guidelines, ensures transparency and efficiency, contributing to the overall stability and growth of the capital markets in India.

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