Right Issue of

Shares.

Submitted by:
Alekha Mittal
Class : SyBBI
(4th sem.)
Roll no. 28.
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Topic To Be Discussed:

a.
b.

Shares.
Placement of Issue.
Right issue of shares.
Reasons for right issue.
Procedures.

Shares.
When the entire capital is divided into number of smaller
units having fixed face value , then such unit is known as
share.
According to sec2(46) of the Indian Contract Act 1956,
shares means share in the share capital of the company
and includes stock except where distinction between stock
and share is expressed and implied.
The Companies Act 1956, mentions only 2 kind of shares:
Equity shares .
Preference shares.

Placement Of Issue.

Offer through prospectus

Offer for sale

Private placement

Book building

Right issue

Red herring prospectus

Right Issue Of Shares.

A company always needs funds for its operations and for
the
fulfillment of this need securities are issued. And
whenevercompany needs further capital then it has to
further issue those securities to its existing shareholders n
then it can issue them to general public.This right to
existing
shareholders is known as right issue. These new shares
are
issued to the existing shareholders as the matter of their
pre-emptive right. Shares issued by the company under
such right is known as right shares.
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Reasons for right issue of

shares.
A company will offer more shares to its
shareholders to raise extra money for
the company. Companies with a poor
cash flow will often use a rights issue to
increase cash flow and pay off existing
debts. Rights issues however are
sometimes issued by companies with
healthy balance sheets in order to fund
research and development projects or to
purchase new companies.
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Example of right issue of shares:

Company ABC Mining has 10 million i.e. 1 crore
shares at a share price of $8

Mr. Smith owns 1,000 shares worth $8,000

ABC Mining needs to raise $30 million to research

new mining locations.

ABC Mining issues 5 million new shares @ $6 each .

This is classed a a 2 to 1 rights issue (10 million old
shares : 5 million new shares)
Which means every 2 shares you own ABC mining will
issue another 1 share.
This means Mr. Smith is being issued with the right to
buy a further 500 shares at $6 ($3,000).
Mr. Smith can either:
a. Buy the further 500 shares for $3,000.
b. Ignore ABC Minings rights issue.
c. Sell his rights on the stock market and make a profit.
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Procedures.
Section 81 of the Companies Act dealing with Right Issue,
provides that whenever a company proposes to increase its
subscribed capital by allotment of further shares any time
after the expiry of two years of its formation or any time
after the expiry of one year from the first allotment of shares
whichever is earlier, then
Such further shares (i.e., new shares) must be offered to
the existing shareholders of the company. The company
sends a letter of offer to the existing shareholders whose
name appears on the register of members mentioning
therein the number of shares to which they are entitled to
in proportion to their old shareholdings.
Periods of Rights offer:
The offer is to be made giving a notice specifying the
number of shares offered. The notice must fix a time,
which should not be less that 15 days from the date of the
offer within which the offer must be accepted. The notice8

 Right to renounce:
The equity shareholders have right to renounce
all or any shares offered to him in favor of their
nominee(s). Shareholders shall inform to the
company within the stipulated period of their
acceptance of right or the name of the nominee to
whom they want to renounce their right.
Application to Additional shares:
An existing shareholders may apply for additional
shares but a shareholder who has renounced his
right in favor of any person is not entitled to apply for
additional shares.
Distribution of shares:
Shares on becoming available on account of nonexercise of rights are allotted to shareholders who
have applied for additional shares pro rata basis. Any
balance of shares left after issuing, the additional
shares can be sold in the open market at the

Four forms may be sent along with letter of rights

Form A: is intended for accepting the rights and applying for
additional shares
Form B: is meant for purpose of renouncing the rights in favor
of other person.
Form C: has to be used by the person in whose favor the rights
have been renounced for making application.
Form D: is for the purpose of requesting for the split forms, for
eg: 50% accepted and 50% rejected.
Form C
A:
B:
D:

Letter of Rights:

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Thank You.
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