Rights issue Method

Rights issue Method

Where the shares of an existing company are offered to its existing shareholders. It takes the form of rights issue. Under this method, the existing company issues shares to its existing shareholder sin proportion in the number of shares already held by them.

The relevant guidelines issued by the SEBI in this regard are as follows:

1.     Shall be issued only by listed companies.

2.     Announcement regarding rights issue once made, shall not be withdrawn and where withdrawn, no security shall be eligible for listing upto 12 months.

3.     Underwriting as to rights issue is optional and appointment of Registrar is compulsory.

4.     Appointment of category I Merchant Bankers holding a certificate of registration issued by SEBI shall be compulsory.

5.     Rights share shall be issued only in respect of fully paid share.

6.     Letter of Offer shall contain disclosures as per SEBI requirements.

7.     Issue shall be kept open for a minimum period of 30 days and for a maximum period of 60 days.

8.     A No complaints Certificate is to be filed by the Legal Merchant Banker with the SEBI after 21 days from the date of issue of the document.

9.     Obligatory for a company where increase in subscribed capital is necessary after two years of its formation of after one year of its first issue of shares, whichever is earlier (this requirement may be dispensed with by a special resolution).

Advantages

Rights issue offers the following advantages

1.     Economy: Rights issue constitutes the most economical method of raising fresh capital, as it involves no underwriting and brokerage costs.

2.     Easy: The issue management procedures connected with the rights issue are easier as only a limited number of applications are to be handled.

3.     Advantage to shareholders: Issue of rights shares does not involve any dilution of ownership of existing shareholders.

Drawbacks

The method suffers from the following limitations:

1.     Restrictive: The facility of rights issue is available only to existing companies and not to new companies.

2.     Against society: the issue of rights shares runs counter to the overall societal consideration of diffusion of share ownership for promoting dispersal of wealth and economic power.