Right Shares Issuance

The issuance of right shares refers to a company's offering of additional shares to its existing shareholders to raise additional capital. This method is strategic for businesses seeking to expand, invest in new projects, or pay off debts without relying heavily on external investors. Here's a comprehensive guide on the issue of right shares, covering every crucial step involved in this corporate action.

Understanding Right Shares

Right shares are offered at a discount to the current market price, providing existing shareholders the opportunity to buy additional shares before the company offers them to the public. This rounds out the shareholder's ownership without diluting the existing ownership percentage.

Companies choose rights issues for several reasons:

• Preservation of Control: Shareholders can maintain their level of control by buying up their entitlement.
• Cost-effectiveness: Rights issues generally cost less than the standard process of public offerings.
• Fast Capital Accumulation: Rapid issuance of shares allows companies to raise significant funds quickly.

Legal Framework and Regulations

In India, the issuance of right shares is governed by the Companies Act, 2013, Securities Contracts (Regulation) Act, 1956, and the SEBI Regulations. The company must adhere to specific compliance requirements including,

• Board Approval: Convene a board meeting for approving the draft offer letter or letter of offer.
• Shareholder Entitlement Notice: Notify shareholders about their rights entitlement ratio and the record date.
• Filing with Stock Exchange: Inform stock exchanges about the rights issue for approval.

Process Involved in a Rights Issue

1. Board Resolution: The board of directors must pass a resolution to initiate the rights issue.
2. Draft Offer Document: Prepare a draft letter of offer outlining the details of the issue.
3. SEBI Compliance: Adhere to SEBI guidelines for public disclosure and transparency.
4. Shareholder Notification: Inform all existing shareholders of their rights entitlement and process for subscription.
5. Acceptance Period: Allow shareholders time to decide on participating in the rights issue.
6. Allotment of Shares: Finalize share allotment based upon shareholder subscriptions.

Benefits and Considerations for Shareholders

Shareholders stand to benefit from subscribing to right shares, such as the opportunity for capital appreciation and avoiding dilution of control. However, they must also weigh the cost of capital funds and potential changes in the market value of shares post-issuance.

For companies, a rights issue can provide the necessary liquidity for business initiatives with a smaller impact on share value compared to a public offering.

Impact on Share Price

It's common for the share price to fall post-issuance due to the increased supply of shares, known as the dilution effect. However, since right shares are usually offered at a discount, it often balances the dilution, preserving shareholder value.

Market Dynamics and Strategies

Companies must analyze market conditions before announcing a rights issue. A strategic approach ensures efficient capital raising with minimal adverse effects on stock valuation.

In conclusion, the issue of right shares is a nuanced decision impacting both companies and shareholders. By understanding its intricacies, both parties can make informed and strategic decisions ensuring long-term benefits.