India: BEST Practices In Rights Issue

Last Updated: 19 February 2019
Article by AMLEGALS  


What is Rights Issue?

Rights Issue is an issue of capital under Section 62 of Companies Act, 2013 and SEBI (ICDR) Regulations, 2009; wherein offer of specified securities by a listed issuer is made to the existing shareholders as on the record date. The rights are offered in a particular ratio to the number of securities held as on the record date.

What is Record Date?

The record date is the cut-off date established by a company in order to determine which shareholders are eligible to receive the specified securities as offered by Rights Issue.

The determination of a record date is required to ascertain who exactly a company's shareholders are as of that date, since shareholders of an actively traded stock are continually changing.

What is Letter of Offer?

The offer of Rights Issue is made through a Letter of Offer. The Letter of Offer is filed with Registrar of Companies (ROC) and the Designated Stock Exchanges. Letter of Offer covers all the relevant information to help an investor to make an informed investment decision.


Under SEBI (ICDR) Regulations, 2009; general conditions have been laid down for the procedure of Rights Issue. The conditions are as follows:

  1. A listed issuer cannot make any Rights Issue of securities, where the aggregate value of such securities, including premium, if any, exceeds 50 Lakhs unless a draft Letter of Offer has been filed withthe Securities Exchange Board of India ("Board"), through a Merchant Banker, at least 30 days prior to the filing of the Letter of Offer with the Designated Stock exchange.

    However, in case of the Rights Issue where the aggregate value of securities offered is less than Rupees 50 Lakhs, the company shall prepare the Letter of Offer in accordance with the disclosure requirements specified in SEBI (ICDR) Regulations, 2009 and file the same with SEBI for its information.
  2. SEBI may issue observations, if any, on the Letter of Offer only after receipt of copy of in-principle approval from all the stock exchanges on which the issuer company intends to list the securities proposed to be offered through the Letter of Offer.
  3. An issuer Company cannot make a Rights Issue of equity shares or any security convertible at later date into equity share, unless all the existing partly paid- up shares have been fully paid or forfeited.
  4. An issuer company cannot make a Rights Issue of securities unless firm arrangements of finance through verifiable means towards 75% of the stated means of finance, excluding the amount to be raised through proposed Rights Issue, or through identifiable internal accruals have been made.
  5. In case of Rights Issue, issue price or price band may not be disclosed in the draft Letter of Offer filed with SEBI. The issue price may be determined any time before fixation of the record date, in consultation with the Designated Stock Exchange.
  6. An issuer company, prior to issue of security through Rights Issue, has to enter into a Memorandum of Understanding between a lead Merchant Banker and the issuer company specifying their mutual rights, liabilities and obligations relating to the issue.
  7. Lead Merchant Banker shall ensure that the Abridged Letter of Offer is dispatched to all shareholders atleast three days before the date of opening of the issue.

    However, if a specific request for Letter of Offer is received from any shareholder, the Lead Merchant Banker shall ensure that the Letter of Offer is made available to such shareholder.
  8. An issuer company has to also make a disclosure to the effect that the securities offered through its upcoming/present Rights Issue shall be made fully paid-up or may be forfeited within 12 months from the date of allotment of securities.
  9. A company cannot make any further issue of capital during the period commencing from the submission of Letter of Offer to SEBI on behalf of the company for Rights Issue, till the securities referred to in the said Letter of Offer have been listed or application money has been refunded on account of non- listing or under subscription etc. unless full disclosures regarding the total capital to be raised from such further issues are made in the draft Letter of Offer.
  10. A Company can not issue any shares by way of Rights Issue unless it has made reservation of equity shares of the same class in favour of the holders of outstanding compulsorily convertible debt instruments, if any, in proportion to the convertible part.
  11. The Lead Merchant Banker shall ensure that in case of a Rights Issue, an advertisement giving the date of completion of dispatch of Letters of Offer, shall be released in at least one English National Daily with wide circulation, one Hindi National Paper and a Regional language daily circulated at the place where registered office of the issuer company is situated at least 3 days before the date of opening of the issue.
  12. An issuer company shall not withdraw Rights Issue after announcement of record date in relation to suchissue.
  13. However, in cases where the issuer has withdrawn the Rights Issue after announcing the record date, the issuer company shall not make an application for listing of any securities of the company for a minimum period of 12 months from the record date.
  14. Rights Issue shall be kept open for at least 15 days but not more than 30 days.
  15. If the issuer company does not receive the minimum subscription of 90% of the issue, the entire subscription shall be refunded to the applicants within 15 days from the date of closure of the issue.
  16. If there is delay after the company becomes liable to pay the subscription amount (i.e. 15 days after closure of the issue), the issuer company will pay interest to the subscribers at the rate of 15% per annum for the period of delay.
  17. The time period for finalization of basis of allotment in the Rights Issue is 15 days from the date of closure of the issue.
  18. The issuer company may utilize the funds collected in the Rights Issue only after the basis of allotment is finalized.


For the issue of right shares, best practices that ought to be followed are enumerated below:

1. Record Date

1.1 Ensure that the record date has been announced for the purpose of determining the shareholders eligible to apply for specified securities in the proposed Rights Issue. It may be noted that the issuer shall not withdraw Rights Issue after announcement of the record date.

1.2 If the issuer withdraws the Rights Issue after announcing the record date, it shall not make an application for listing any of its specified securities on any recognized stock exchange for a period of 12 months from the record date.

2. Restriction on Rights Issue

2.1 No issuer shall make a Rights Issue of equity shares if it has outstanding fully or partly convertible debt instruments at the time of making Rights Issue, unless it has made reservation of equity shares of the same class in favor of the holders of such outstanding convertible debt instruments in proportion to the convertible part thereof.

2.2 The equity shares reserved for the holders of fully or partially convertible debt instruments shall be issued at the time of conversion of such convertible debt instruments on the same terms on which the equity shares offered in the Rights Issue were offered.

3. Letter of Offer, Abridged Letter Of Offer

3.1 The abridged letter of offer, along with the application form, shall be dispatched through the registered post or speed post to all the existing shareholders atleast three days before the date of opening of the issue.

3.2 The letter of offer shall be given by the issuer or the lead merchant banker to any existing shareholder who has made a request in this regard.

3.3 The shareholders who have not received the application form may apply in writing on a plain paper, along with the requisite application money. If any shareholder makes an application on application form as well as on plain paper, the application is liable to be rejected.

4. Pricing

The issue price shall be decided before determining the record date which shall be determined in consultation with the designated stock exchange.

5. Period Of Subscription

A Rights Issue shall be open for subscription for a minimum period of 15 days and for a maximum period of 30 days.

6. Pre- Issue Advertisement For Rights Issue

The issuer shall issue an advertisement for Rights Issue disclosing the following:

  1. The date of completion of dispatch of abridged letter of offer and the application form;
  2. The centers other than registered office of the issuer where the shareholders or the persons entitled to receive the rights entitlements may obtain duplicate copies of application forms in case they do not receive the application form within a reasonable time after opening of the Rights Issue.

7. Obligation Of Issuer/ Intermediaries

The obligation of issuer/ intermediaries for a Rights Issue arises with respect to advertisement, appointment of compliance officer, Redressal of investor grievances, due diligence, post issue reports, post issue advertisements etc.


Legal due diligence is an art that requires expertise in asking, gathering and reporting of sensitive information. It is a precautionary operation through which one can know the strengths and weaknesses of the company through the maximum possible information available. This entire process of legal due diligence reduces future problems and ensures safety.

It includes preparation of regulatory checklists meeting with personnel, independent check with regulatory authorities etc. apart from document verification.

The areas for holistic due diligence are as below:

1. Regulatory Compliance

It would include compliance requirements of the company under various applicable laws such as Companies Act; SEBI Act, rules and regulations; Income tax Act and other business related laws as applicable in India.

2. Contractual Compliance

It would include the compliance by the company under carious material contracts by the company with suppliers, customers, employees, etc. and to verify whether the company has complied with the terms and conditions of different contracts.

3. Compliance under Inter-corporate aspects

It would include the compliance by the company under the intra-company documents such as Memorandum and Article of Association, Corporate policies, procedures, code of conduct, etc.

4. Financial Aspects

It includes the thorough reading of the balance sheet to identify the financial obligations of the company, penalties paid for violations in the past.

5. Non- Financial Aspects

It shall include the examination of the aspects such as reputation and goodwill of the company.

6. Cultural Aspects

In case of cross border transactions, compatibility and adaptability of corporate cultures are to be analysed to eliminate the problems that may arise out of cultural differences.

The following are the various important aspects covered as scope of due diligence in general. However, the list provided herein is not an exhaustive list and the scope may vary according to the nature of business decision.

1. Under Companies Act

  1. Compliance with provision of Articles of Association
  2. Related Parties Transaction
  3. Appointment of and remuneration of Directors
  4. Contracts with Directors
  5. Loans to Director
  6. Borrowings by the Company and securities offered
  7. Matters such as disclosure, prospectus, etc.
  8. Distribution of dividend
  9. Maintenance of statutory registers, minutes books, etc.
  10. Filing of necessary returns

2. Under Tax Laws

  1. Status of tax assessments
  2. Identification of potential tax liabilities
  3. Pending notices and demands
  4. Impact of business agreements on potential tax demands
  5. Aspects relating to double- taxation

3. Under Other Business Laws

  1. Registrations and approvals from various authorities and risks on non- compliance
  2. Compliance under pollution control laws
  3. Intellectual property rights related matters
  4. Issues relating to immovable properties, title deeds, etc.
  5. Compliance under FEMA, insurance laws, etc.

Ultimately, the thrust should be to meticulously evolve a process wherein all four corners of the issue are well screened and implemented in an expeditiously manner.

This content is purely an academic analysis under "Legal intelligence series".

© Copyright AMLEGALS.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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