[2012] 21 taxmann.

com 183 (Article)

Issue of Right Shares Under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

Hem Raj Tuteja

CS

'Rights issue' means issuing further shares to the existing shareholders without diluting their stake, unless they
renounce their entitlement. Section 81 of the Companies Act, 1956 allows companies to make rights issue. Listing
Agreement imposes certain responsibilities on the listed companies to make certain disclosures. Similarly, SEBI
has streamlined the disclosures in the regulations known as the SEBI (Issue of Capital and Disclosures
Requirements) Regulations, 2009.

Introduction

1. Section 81 of the Companies Act, 1956 mandates that a public company limited by shares can increase its
subscribed capital by issuing further shares to the existing shareholders provided the articles of the company
provide, for such issue. Regulation 2(1)(zg) of the SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2009 defines a 'rights issue' as an offer of specified securities by a listed company to its
shareholders as on the record date fixed for said purpose. Truly speaking the 'rights issue' is the best route of
raising further capital from the existing shareholders without diluting their stake. Section 81 of the Companies Act,
1956 requires that a company may issue 'rights shares' if at least two years have elapsed since its incorporation
or one year has elapsed since it made first allotment of shares, whichever is earlier. For the purpose of issuing
rights shares the company is required to give notice to the existing shareholders either to buy shares offered to
them or to renounce their entitlement within a period of 15 days from the date of notice. Listing Agreement has
made certain provisions for issue of 'rights shares' by the listed companies. SEBI has streamlined the procedure
for issue of rights shares through its regulations, called as SEBI (Issue of Capital and Disclosure Requirements),
2009, hereinafter called as the Regulations. The procedure is discussed in the following paras.

Conditions for 'rights issue' (Regulation 4)

2. Regulation 4 of the Regulations envisages that a company can issue rights shares if-

(i)  It or any of its promoters, directors or persons in control of the company is not debarred from accessing the
capital market by SEBI;

(ii)  Any of its promoters, directors or persons in control of the company was or also is a promoter, director or person in
control of any other company which is not debarred from accessing the capital market by SEBI;

(iii)  The company as issuer of convertible debt instruments is not in the list of wilful defaulters published by RBI or it is
not in default of payment of interest or principal amount in respect of debt instruments issued by it to the public, if
any, for a period of more than six months;

(iv)  It has made an application to one or more recognized stock exchanges for listing of specified securities on such
stock exchanges and has chosen one of them as the Designated Stock Exchange (DSE).

(v)  It has entered into an agreement with a depository for dematerialization of specified securities already issued or
proposed to be issued ;

(vi)  There is no partly paid-up equity share.

(vii)  It has made firm arrangement of finance through verifiable means towards seventy five per cent of the stated
means of finance, excluding the amount to be raised through the proposed rights issue or through existing
identifiable internal accruals.
 Restrictions on Rights issue (Regulation 53)

3. If a company has some outstanding fully or partly convertible debt instruments at the time of making rights
issue, it cannot make rights issue, unless it has made reservation of equity shares of the same class in favour of
the holders of such outstanding debt instruments in proportion to the convertible part thereof

Further, the equity shares so reserved are to be issued to the holders of such outstanding debt instruments at the
time of their conversion on the same terms on which the equity shares are issued to the shareholders exercising
rights.

4. Effects of Rights issue

 1.  Capital stands increased after completion of rights issue process;

 2.  Company has the benefit of liquidity in the market';

 3.  Regarding earnings per share, book value of shares stands increased;

 4.  Better cash flow is available to the company;

 5.  Image of the company gets improved;

5. Process of rights issue

5.1 Prior intimation to stock exchange [Clause 19 (a) of the Listing Agreement] - When a company decides
to issue shares on rights basis, it has to pass a resolution in the Board Meeting. For this purpose, the company is
required to give prior intimation to the concerned recognized Stock Exchange about the Board Meeting at which
the proposal for issue of shares on rights basis is to be considered at least two working days in advance of the
Board Meeting.

5.2 Board Meeting [Clause 22(a) of the Listing Agreement] - Company shall convene a Board Meeting to
pass necessary resolution authorizing the company to:

(i)  issue shares on rights basis and to finalize terms and conditions of the issue;

(ii)  send letter of offer and composite application form;

(iii)  appoint lead managers, banker to issue and Registrar to the issue;

(iv)  approve the submission of listing application to Stock Exchange; and

(v)  convene a general meeting.

5.3 Intimation to Stock Exchange [Clause 22(a) of the Listing Agreement] - An intimation of the decisions
taken in the Board Meeting shall be made to the concerned Stock Exchange within 15 minutes of the closure of
the Board meeting.

5.4 General Meeting - As scheduled, a general meeting shall be convened to pass a special resolution for rights
issue and other related matters, such as amendment to the capital clause of the memorandum and the relevant
clauses of the Articles of Association of the company.

Appointment of Intermediaries (Regulation 5)

6. Intermediaries such as merchant banker(s), bankers to the issue, Registrar to the issue, and underwriters to the
issue should be appointed as follows:
 6.1 Merchant bankers to issue - Company shall appoint one or more merchant bankers. If more than one
merchant banker is appointed, then one of them shall act as a lead merchant banker to assist the company to
appoint other intermediaries to carry out obligations relating to the issue.

In case of more than one merchant banker, the rights, obligations, refund and underwriting obligations of each of
them shall be predetermined and disclosed in the offer letter as specified in Schedule I appended to the
SEBI(Issue of Capital the and disclosures) Regulations, 2009.

The company shall enter into an agreement with lead merchant banker in the format specified in Schedule II and
with other intermediaries as required under respective regulations applicable to the intermediaries concerned.

Since SEBI has introduced Application Supported by Blocked Account (ASBA) facility of payment of price of the
rights shares, it will be the duty of the company issuing rights shares to take cognizance of its deemed agreement
with Self Certified Syndicate Banks.

6.2 Syndicate members/bankers to issue -The company is under an obligation to appoint bankers to the issue
at all mandatory collection centers as specified in Schedule III and also in all other non-mandatory collection
centers. However, where book building process is involved in the issue, it is incumbent on the company to appoint
syndicate members.

6.3 Registrar to the issue - Appointment of a Registrar should be made to enable him to have connectivity with
all the depositories. Where the company is itself a Registrar to an issue, it has to make an appointment of another
Registrar to issue to act as its Registrar to the issue. It should be ensured that no lead merchant banker can be
appointed as a Registrar to the issue, where it has to handle post-issue responsibilities. In case of a book built
issue, the lead merchant banker shall act as the lead book runner.

6.4 Underwriters to issue - Where the company intends that the rights issue should be underwritten, it shall
appoint underwriter(s). For this purpose it has to enter into an underwriting agreement with the book runner,
which, in turn, shall enter into an underwriting agreement with syndicate members, indicating therein the number
of securities which they shall subscribe to at the predetermined price, if the rights issue remains undersubscribed.
In case the syndicate members fail to fulfil their underwriting obligations, the lead book runner shall fulfil those
obligations. A copy of the respective agreement is to be filed with the SEBI before the opening of bids.

It is to be noted that the book runner/syndicate members shall act in a manner as provided in the agreement, i.e.,
they shall not subscribe to the issue in any manner except for fulfilling underwriting obligations. For this purpose,
the provisions contained in the SEBI (Merchant Bankers) Regulations, 1992 are to be followed. These regulations
provide that each lead merchant banker or lead book runner shall undertake minimum underwriting obligations.
Where hundred per cent of the offer through offer document is underwritten, the underwriting obligations shall be
for the entire hundred per cent of the offer through offer document and shall not be restricted to the minimum
subscription level.

7. Filing of offer Document (Regulation 6)

7.1 Filing of offer document with the SEBI - Where the aggregate value of the specified securities offered is
fifty lakh or more, the company cannot make a rights issue, unless it files a draft offer document, along with a fee
as prescribed in Schedule IV appended to the Issue of Capital Regulations, 2009 through its lead merchant
banker at least 30 days prior to the filing of letter of offer with the designated Stock Exchange. It is the duty of the
lead merchant banker to file the draft offer document/offer document with the concerned office of the SEBI on
estimated size of the issue as indicated in the Annexure.

SEBI has to study the offer document and specify changes or issue observations, if any, within 30 days from:

(i)  the date of receipt of the draft offer document; or

(ii)  the date of receipt of satisfactory reply from the lead merchant bankers, where the SEBI has sought any
clarification or additional information from them; or
(iii)  the date of receipt of clarification or information from any regulator or agency, where the SEBI has sought
clarification from such regulator/agency; or

(iv)  the date of receipt of a copy of in-principle approval letter issued by the recognized Stock Exchange, whichever is
later.

7.2 Incorporation of changes - If SEBI advises any changes or observations, the company and its merchant
banker shall incorporate such changes and carry out the observations on the draft offer document. Thereafter, the
company shall file the letter of offer with the designated Stock Exchange through the merchant banker. The offer
document filed with the SEBI shall be furnished to the SEBI with a copy thereof to the recognized Stock
Exchange(s) where the securities of the company are proposed to be listed, in a soft copy, in a manner specified
in Schedule V appended to the SEBI (ICDR) Regulations, 2009.

Obtaining In - Principle Approval From The Stock Exchange/Exchanges-(Regulation 7)

8. The company shall obtain in-principle approval from all the Stock Exchanges as follows:

(i)  Where the specified securities of the company are listed on the recognized Stock Exchanges having
nationwide trading terminals, from all such Stock Exchanges;

(ii)  Where the specified securities are not listed on any recognized Stock Exchange having nationwide trading
terminals, from all the Stock Exchanges in which the specified securities are proposed to be listed;

(iii)  Where the specified securities are listed on recognized Stock Exchanges having nationwide trading terminals as
well as on the recognized Stock Exchanges not having nationwide trading terminals, from all recognized Stock
Exchanges having nationwide terminals.

9. Other Documents to Be Submitted (Regulation 8)

9.1 Along with the offer document - The lead merchant banker(s) shall submit the following documents along
with draft offer letter to the SEBI:

(a)  a copy of the agreement entered into between the company and the lead merchant bankers;

(b)  a copy of inter se allocation of responsibilities of each merchant banker, in case the issue is managed by
more than one merchant banker;

(c)  a due diligence certificate as per Form A of Schedule VI of the Regulations;

(d)  in case of an issue of convertible debt instrument, a due diligence certificate from debenture trustee as per Form B
of Schedule VI of the Regulations;

(e)  a certificate in the format specified in Part D of Schedule VII of the Regulations, in confirmation of compliance of
the conditions mentioned therein.

9.2 After Issuance of Observations By SEBI or After Expiry of Period Stipulated In Regulation 6(2), Where
SEBI Has Not Issued Observations:

(a)  a statement certifying that all changes, suggestions and observations made by SEBI have been incorporated
in the offer document;

(b)  a due diligence certificate as per Form C of Schedule VI of the Regulations at the time of registering the
prospectus with the RoC;

(c)  a copy of resolution passed by the BoD of the company for allotting specified securities to promoters towards
 amount received against promoters' contribution, before opening of the issue;

(d)  a certificate from a Chartered Accountant, before opening of issue, certifying that promoters' contribution has been
received in accordance with these regulations, accompanied with names and addresses of the persons who have
contributed towards the promoters' contribution and the amount paid by each of them towards such contribution;

(e)  a due diligence certificate as per Form D of Schedule VI of the Regulations, immediately before the opening
of the issue, certifying that necessary corrective action, if any, has been taken;

(f)  a due diligence certificate as per Form E of Schedule VI of the Regulations, after the issue has been opened
but before it is closed for subscription.

9.3 Intimation of Promoters' Particulars to The Stock Exchanges - While filing draft offer document to the
recognized Stock Exchanges, the company should submit the Permanent Account Number, bank account number
of its promoters to such Stock Exchanges.

Draft offer document to be made public (Regulation 9)

10. The draft offer document filed with the SEBI has to be made open for 21 days from the date of filing with SEBI,
to the public for comments. For this purpose, the document in question shall be hosted on the website of the
SEBI, recognized stock exchanges where the specified securities are proposed to be listed and merchant bankers
associated with the issue.

After expiry of 21 days from the date of filing of draft offer document with SEBI, the lead merchant banker shall
submit a statement to the SEBI intimating the comments received from the public, if any, along with consequential
changes, if made in the draft offer document.

Opening of Issue {(Regulation 11 (1) & ( 2)

11. A company going in for rights issue shall comply with the provisions of sub-section (4) of section 60 of the
Companies Act, 1956 as well as the provisions contained in the Regulation 4 of the ICDR Regulations. In
compliance of the provisions of section 60(4) of the Companies Act, 1956, the company may open its offer for
issue of rights shares as under:-

(a)  within 12 months from the date of issuance of observations by SEBI, or within 3 months of the expiry of the
period stipulated in sub-regulation (2) of regulation 6 of the Regulations;

(b)  within 3 months of the expiry of period stipulated in sub-regulation (2) of regulation 6 of the Regulations, where
SEBI has not issued any observation.

(c)  within a period stipulated in sub-section (4) of section 60 of the Companies Act, 1956, where the rights issue
is through fast track;

(d)  within 3 months of the issue of observation by SEBI, where the company has issued shelf prospectus.

Filing of updated offer document with SEBI {Regulations (3) & (4)

12. The company shall, before filing the offer letter with the DSE, file with the SEBI through the lead merchant
bankers, an updated offer document highlighting all changes made in the offer document.

Where the changes pertain to the matters specified in Schedule VII of the Regulations, the company should file
updated offer document or a new draft offer document, as the case be, with the SEBI along with the fees specified
in Schedule IV of the said regulations.

Dispatch of Issue Material in Advance (Regulation 12)

13. The company should ensure that the lead merchant bankers dispatch the offer document and other issue
material, including forms for ABSA to the designated stock exchanges, syndicate members, underwriters, bankers
to the issue, investors' associations and self certified syndicate banks in advance.

Announcement of record date (Regulation 52)

14. The company should announce a record date for the purpose of determining the shareholders eligible to apply
for specified securities in the proposed rights issue. Once the record date has been announced, the rights issue
cannot be withdrawn. If the company withdraws the rights issue after making the announcement of record date, it
cannot seek listing of specified securities on any recognized stock exchange for a period of 12 months from the
record date so announced.

However, the company can seek listing of its equity shares allotted pursuant to conversion or exchange of
convertible securities issued prior to the announcement of the record date, on the recognized stock exchange
where its securities are listed.

Disptach of letter of offer and application form (Regulation 54)

15. The lead merchant banks shall dispatch the abridged letter of offer along with application form by registered
post or speed post to all the existing shareholders at least 3 days before the date of opening of the issue. Where a
shareholder does not receive the application form, he/she can make request in this regard. For this purpose, the
applicant should apply in writing on a plain paper, along with requisite application money. The shareholders
making application for issue of rights shares cannot renounce their rights and cannot utilize the application form
for any purpose including renunciation even if it is received subsequently. Where a shareholder makes request for
issue of rights shares by submitting application in proper form as well as submits an application on a plain paper,
his/her application is liable to be rejected.

Pre-issue Advertisement for rights issue (Regulation 55)

16. The company shall make an advertisement in at least one English daily with wide circulation, one Hindi
national daily with wide circulation and one regional language news paper with wide circulation at the place where
registered office of the company is situated, at least three days before the date of opening of the issue. The
advertisement shall disclose the following details:

(a)  the date of dispatch of abridged letter of offer and the application form;

(b)  the centre, other than the registered office of the company, where the shareholders or the persons entitled to
receive the rights entitlement may obtain duplicate copies of the application form in case they do not receive the
application form within a reasonable time after opening of the rights issue;

(c)  a statement that if the shareholders entitled to receive the rights entitlement have neither received the original
application forms nor they are in a position to obtain duplicate forms, they may make application in writing on a
plain paper to subscribe to the issue;

(d)  a format to enable the shareholders entitled to apply against their rights entitlements, to make application on a
plain paper specifying therein necessary particulars such as name, address, ratio of rights issue, issue price,
number of equity shares held, ledger folio numbers, depository participant ID, client ID, number of equity shares
entitled to and applied for, additional shares, if any, amount to be paid along with application, and particulars of
cheque, etc., to be drawn in favour of the company's account and a statement that the applications can be directly
sent by the shareholders entitled to apply through registered post together with the application money to the
company's designated official at the address given in the advertisement;

(e)  a statement to the effect that if the shareholder makes an application on a plain paper and also on application
form both his/her applications shall be liable to be rejected at the option of the company.

Reservation for employees (Regulation 55A)

17. The company can make reservation for employees along with rights issue provided the value of allotment to
any employee shall not exceed one lakh rupees.

Listing Requirements (Regulation)

18. After completing the process of dispatch of letter of offer and composite application forms to the shareholders,
the company shall submit the listing application to the concerned stock exchanges, whose names appear in the
letter of offer for listing the rights issue. It shall pay a sum equivalent to one per cent of the issue towards the
listing fee to the designated stock exchange as a security for due compliance of law and listing requirements.

Subscription period available to shareholders (Regulation)

19. The rights issue shall remain open for subscription for a minimum period of 15 days or for a maximum period
of 30 days. However, clause 23(e) of the Listing Agreement provides that shareholders are free to record their
interest and exercise their rights within 4 weeks time from the date of opening of the rights issue.

Basis of allotment (Regulation 50)

20. Immediately after the closure of rights issue, the company shall finalize the basis of allotment in consultation
with the Designated Stock Exchange (DSE) and file a return of allotment in e-Form 2 with RoC within 30 days of
allotment of right shares. Thereafter, the funds collected under the rights issue can be utilized by the company.

Post-issue reports (Regulation 65)

21. The post-issue lead merchant banker shall submit the post-issue reports to the SEBI as under:

(a)  Initial Post-issue Report - the report as specified in Parts A & B of Schedule XVI of the Regulations, within 3
days of closure of issue;

(b)  Final post-issue report-the report as specified in Parts C & D of Schedule XVI of the Regulations within 15
days from the date of finalization of basis of allotment or within 15 days of refund of money in case of failure of
issue.

(c)  Due diligence certificate - Due Diligence Certificate as set out in Form G of Schedule VI duly signed by the
lead merchant banker should be submitted along with final post-issue report.

Post-issue advertisement (Regulation 66)

22. An advertisement carrying the following information shall be published within 10 days of completion of various
activities in at least one English national daily with wide circulation, one Hindi national daily with wide circulation
and one regional language daily with wide circulation at the place where registered office of the company is
situated:

  •  Details relating to oversubscription

  •  Basis of allotment

  •  Number, value and percentage of all applications, including ABSA

  •  Number, value and percentage of successful allottees for all application, including ASBA

  •  Date of completion of dispatch of refund orders or instructions to Self Certified Syndicate Banks

  •  Date of dispatch of certificates

  •  Date of filing of listing application

Note : It is the duty of post-issue merchant banker to ensure that except above advertisement, no other
advertisement stating that issue has been oversubscribed or indicating investors' response to the issue is to be
issued by any person including the company, company's advisor, broker, any other entity connected with the
rights issue, during the period the issue is open for subscription by the public.

Conclusion

23. SEBI has streamlined the procedure for issue of rights shares. Rights issue is the best route of raising further
capital by a company. Existing shareholders have pre-emptive right to subscribe on pro rata to a new issue of
securities. The shareholders basis who receive offers for subscribing to the rights shares are entitled to renounce
their rights. The companies have the benefit of liquidity in the market. Earnings per share and the book value of
the shares stand increased. The process involved is very simple and capital of the company is increased without
involving the public at large. However, all the listed as well as unlisted companies have to comply with the
provisions of section 81 of the Companies Act, 1956 mandatorily, but private companies have an option not to
comply with the same. Where a private company wants to comply with the provisions of the said section, it has to
specifically provide for the same in its Articles of Association.

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