Rights issue and bonus issue

CS Meenakshi Jayaraman

DVS Advisors LLP

India-Singapore-London-Dubai-Malaysia-Africa
www.dvsca.com
Credits and Acknowledgments
Sundar Rajan S
Legends used in the presentation
Act Companies Act, 2013

AOA Articles of Association

BOD Board of Directors

FMV Fair Market Value

IFSC International Financial Services Centre

ITA Income Tax Act

Presentation Schema

Provisions under
Types of issue Rights issue Exceptions
the Act

Reserves to be
Secretarial utilised and
Caveats Bonus issue
Compliance conditions to be
fulfilled

Secretarial Income Tax

Caveats Judicial precedents
Compliance implications
 Types of issue
Fund raising

Equity Debt

Private
Sweat equity ESOP Bonus issue Public issue Rights issue
placement
Rights issue

It is the process of raising funds by issuing shares to the existing shareholders of the Company

It means that the existing shareholders have the pre-emptive right to subscribe the shares of the Company in
relation to an outsider

Rights issue can be opted by a Company only in case of further issue of shares and not at the time of first issue

The shareholder has the right to either accept or renounce the offer made by the Company
Provisions under the Act – Section 62 (1) & (2)

Board resolution should be passed by the Company for approval of rights issue

Letter of offer containing the terms and conditions of the rights issue along with share application form, renunciation form
and application to be made by renouncee shall be sent to the shareholders

Unless the AOA of the Company otherwise provide, the letter of offer shall contain a statement of right to renounce the
offer by the shareholder in favour of any other person
Contd.
Time limit for accepting or renouncing the offer shall be not less than 15 days but not more than 30 days*. If response is not
obtained from the shareholder within this time period, the offer shall be deemed as declined

After the lapse of time period for accepting or renouncing the offer by the shareholder or on receipt of notice from such
shareholder rejecting the offer, the BOD may dispose of those shares in a manner not disadvantageous to the shareholders
and the Company

Letter of offer shall be dispatched through speed/registered post, courier, electronic mode or any other mode having proof
of delivery to all existing shareholders atleast 3 days before the opening of issue**

*However, exception is granted to private and specified IFSC public Companies

** However, exception is granted to private Companies
Exceptions

• Lower time limit for accepting or renouncing the offer or dispatching the
letter of offer shall be given to shareholders provided,
Private Company
• 90% of the members of the Company have given their consent in
writing or in electronic mode

• Lower time limit for accepting or renouncing the offer shall be given to
Specified IFSC public shareholders provided,
Company • 90% of the members of the Company have given their consent in
writing or in electronic mode

Nidhi Company • Provisions of Section 62, on the whole, shall not apply
 Secretarial Compliance
i. For approval of rights issue:

Notice for Board meeting for

Issuance of letter of offer and
rights issue approval should be Board resolution for approval of
other documents to shareholders
issued to the Directors atleast 7 rights issue and preparing
(Share application, Renunciation
days before the date of meeting – minutes of the meeting
form, etc.)
Section 173(3)

File Form MGT-14 within 30 days Attachments to the Form MGT-14

of passing BOD resolution – shall be the certified true copy of
Section 117(3)(g) read with the BOD resolution and offer
179(3)* letter issued to shareholders

*Exempt for private and specified IFSC public Companies. Hence, Form MGT-14 need not be filed
Contd.
ii. For allotment of shares by rights issue (after receiving money from the shareholders):

Notice for Board meeting for

Such Board meeting to be held
allotment of shares should be Drafting Board resolution and
within 60 days from the date of
issued to the Directors atleast 7 minutes for allotment of shares
receipt of money from
days before the date of meeting – by rights issue
shareholders
Section 173(3)

Mandatory attachments to Form

File Form PAS-3 within 30 days Share certificate shall be issued
PAS-3 shall be list of allottees and
from the date of allotment of within 2 months from the date of
certified true copy of BOD
shares allotment
resolution for allotment
 Caveats

Board resolution is sufficient for approval of rights issue. Consent of members in general meeting is not required to be obtained

Prior to rights issue, the Company shall ensure that its authorised share capital is more than the post rights issue paid-up capital. If
not, the Company shall first alter its share capital and then proceed with rights issue. Form SH-7 to be filed

Valuation report is not required to be obtained for issue of shares by rights issue
Sample format of documents
i. Share application form
Contd.
ii. Renunciation Form
Contd. iii. Renouncee application Form
Bonus issue

It is the process of issue of additional shares to the existing shareholders without any consideration

It is generally given in proportion to shareholding and dividend rights

It is given to retain the surplus or to build trust amongst the shareholders

Reserves to be utilised – Section 63(1)
Bonus shares shall be issued by the Company only out of following reserves*:

1. Free reserves

2. Securities premium account

3. Capital redemption reserve

*In any case, reserves created by way of revaluation of assets shall not be utilised for issue of bonus shares
Conditions to be fulfilled – Section 63 (2)
The following conditions have to be fulfilled for issue of bonus shares by the Company:

Such issue is authorised by its AOA

Board and members consent has to be obtained in Board and general meeting respectively

Company has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it

Company has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to
provident fund, gratuity and bonus

Partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up

Once recommendation has been given by the Board, it shall not subsequently withdraw the same

The bonus shares shall not be issued in lieu of dividend

Secretarial compliance
Notice for Board meeting for
File Form MGT-14 within 30
issue of bonus shares should Draft resolution and minutes
days of passing BOD
be issued to the Directors of BOD meeting for issue of
resolution – Section 117(3)(g)
atleast 7 days before the date bonus shares
read with 179(3)*
of meeting – Section 173(3)

File Form PAS-3 within 30

days of passing BOD Draft resolution and minutes
Prepare notice along with
resolution for allotment of of general meeting of
explanatory statement for
shares with list of allotees and members for approval of
convening general meeting
BOD resolution as mandatory bonus issue
attachments

*Exempt for private and specified IFSC public Companies. Hence, Form MGT-14 need not be filed

Shares certificate shall be issued within 2 months from the date of allotment
Caveats

Bonus shares shall not be issued in lieu of dividend

Special resolution is not required to be passed in general meeting of members for approval of bonus issue.
Ordinary resolution is sufficient

Unlike rights issue, there is no option for renunciation of bonus shares

Prior to bonus issue, the Company shall ensure that its authorised share capital can accommodate the post bonus issue paid-up
capital. If not, the Company shall first alter its share capital and then proceed with bonus issue. Form SH-7 to be filed
Tax implications under ITA

Property being shares of a Company, received by a person, without consideration, whose value exceeds Rs.
50,000 is chargeable to tax in the hands of the recipient

Entire FMV of shares is chargeable to tax and not difference between FMV and Rs. 50,000

Hence, in case of any person who receives bonus shares whose FMV exceeds Rs. 50,000, is chargeable to tax
since bonus shares are received for nil consideration
Judicial Precedents
Vestal Educational Services (P.) Ltd. vs. Lanka Venkata Naga Muralidhar - [2018] 100 taxmann.com 286 (NCL-AT)

Amount lent by shareholder to company to repay loan had been converted into equity without his knowledge, intimation or
authorization

Appellant claimed that allotment was done on basis of decision taken in board meeting where offer was made regarding issue
of equity shares at par on right issue basis to existing shareholders and respondent was shown as entitled/offered shares

However, company had not produced any evidence with regard to issue of notice offering shares to respondent or any other
shareholder and its acceptance by respondent

Thus, NCLAT held that impugned order passed by NCLT declaring said allotment to be null and void, was correct
 Thank You
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India-Singapore-London-Dubai-Malaysia-Africa
www.dvsca.com
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