RIGHT ISSUE

  

CHECKLIST FOR RIGHT ISSUE
(Other than Listed Company)

 

v  RIGHT ISSUE

 

Ø An issue of capital to the existing shareholders of the Company in same proportion to the existing holding through letter of offer

Ø  The offer made to the existing shareholding is not binding upon them, they can renounce their right in favour of any other person (whether Member or Not)

 

v  CHECKLIST

 

Ø  CHECK WEATHER ARTICLES AUTHORISE RIGHT ISSUE:-

 

If not, take steps to increase the authorized capital

 

Ø  LETTER OF OFFER:-

 

Finalize the draft letter of offer for issuing equity shares through right issue. No specific format of Letter of offer is prescribed. However letter of offer shall contain offer price, face value of shares, Mode & terms of payment and right to renounce

 

Ø  BOARD MEETING:-

 

Hold Board Meeting and pass resolution for approval of letter of offer. Notice of BM to be sent at least 7 days before date of BM.

 

Ø  FILING OF MGT-14:-

 

File MGT-14 within 30 days from passing board resolution. (This provision is not applicable to private companies)

 

Ø  DISPATCH LETTER OF OFFER:-

 

Dispatch Letter of Offer through registered post, speed post or electronic mode to all existing shareholders. Letter of Offer to be sent at least three days prior to opening of issue (Hand delivery of letter of offer is not permissible)

 

Ø  TIME PERIOD OF OPEN OFFER:-

 

Offer to be kept open for minimum 15 days upto 30 days.

Provided that in case of a private company, if ninety percent of members have given their consent in writing or in electronic mode, the period lesser than those specified shall apply

 

Ø  DEEMED REFUSAL:-

 

No Intimation in 30 days would be deemed to be refusal of the offer.

 

Ø  ANOTHER BOARD MEETING:–

 

Hold another Board Meeting to approve issue of shares to shareholders who have opted for the Right Issue of shares. Notice of BM to be sent at least 7 days before date of BM

 

Ø  ISSUANCE OF SHARES:–

 

Issue shares in accordance with the list of allottees approved in the Board Meeting

 

Ø  FILING OF PAS- 3:-

 

File PAS-3 within 30 days from date of allotment – return of allotment

 

Ø  ISSUANCE OF SHARE CERTIFICATES:-

 

Issue Share Certificate within 2 months from date of allotment

 

CHECKLIST FOR RIGHT ISSUE
(Listed Company)

 

v  RIGHT ISSUE

 

Ø  These Regulations are applicable to a Rights Issue of a Listed Company, where the aggregate value of specified securities offered is fifty lakh rupees or more

 

v  CHECKLIST

 

Ø  CHECK WEATHER ARTICLES AUTHORISE RIGHT ISSUE:-

 

If not, take steps to increase the authorized capital

 

Ø APPOINTMENT OF MERCHANT BANKER AND OTHER INTERMEDIARIES :

 

The issuer shall appoint one or more merchant bankers, at least one of whom shall be a lead merchant banker and shall also appoint other intermediaries only those who are registered with SEBI, in consultation with the lead merchant banker, to carry out the obligations relating to the issue

 

Ø  IN-PRINCIPLE APPROVAL OF STOCK EXCHANGE:

 

The Company must obtain in-principle approval for its Rights Issue from the Stock Exchanges where the company shares are listed

Ø DOCUMENTS TO BE SUBMITTED BEFORE OPENING OF THE ISSUE:

 

The Lead merchant Banker shall submit the documents mentioned in regulation 8 of chapter II of along with draft offer document.        

 

Ø  FILING OF OFFER DOCUMENT:

 

File letter of offer at least 30 days prior to file the same with designated stock exchanges. If SEBI specifies any change in it then issuer shall carry out such changes. The offer document filed with the board under this regulation shall also be furnished to the Board in a soft Copy in the manner specified in Schedule V.

 

Ø  FORMAT OF LETTER OF OFFER:

 

Specified in schedule viii of part A or E specified in regulation 57(2)(b). If a
company complies with conditions mentioned in clause 1 of part E then it has required making L.O.O. according to Part E

 

Ø  PRE-ISSUE ADVERTISEMENT OF RIGHT ISSUE:

 

At least 3 days before opening of the issue.

 

Ø  ABRIDGE L.O.O TO SHAREHOLDERS:

 

At least 3 days before opening of issue.

 

Ø  MINIMUM SUBSCRIPTION:

 

Minimum subscription of issue size shall be 90 % of the issue size.

 

Ø  RECORD DATE –

 

7 working days notice given for record date.

 

Ø  ISSUE OPENING DATE:

 

As according to regulation 11 of chapter II

The Rights Issue must be opened for subscription for a minimum period of 15 days and Maximum period of 30 days

 

Ø  PRICING:

 

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

 

Ø  OVER SUBSCRIPTION:

 

No part of over subscription of Rights Issue shall be retained by the Listed Company; the amount has to be refunded

 

Ø  WITHDRAWAL OF THE RIGHTS ISSUE:

 

No Rights Issue can be withdrawn by issuer after fixing the Record Date. In
case if it has withdrawn after announcing record date, no further issue of capital is allowed for a period of 12 months from the record date.

 

Ø  LODR REQUIREMENT:

 

Intimation to stock exchange: at least 2 days intimation to stock exchange as per regulation 29 of SEBI, LODR Regulations 2015.

TYPES OF RESERVES

 1)     GENERAL RESERVE / CONTINGENCY RESERVE

-        Part of the profits which is set aside to meet any future unknown contingency or emergency

May be credited:

o   To meet the increasing demands of the business;

o   To stabilize the economic conditions of the firm;

o   To meet unforeseen losses; and

o   To control the profits of the company.

2)     SPECIFIC RESERVE

-        Created of some definite or specific purpose

i.e.

o   Dividend “Equalization Reserve,

o   Reserve for Repair,

o   Reserve for Outstanding Expanses, and

o   Reserve for Building etc.

3)     REVENUE RESERVE

-        Consist of un-contributed revenue gains consisting of profits made in the ordinary course of business.

-        The funds of these reserves may be used:

o   To maintain a business or

o   Pay dividends.

-        Revenue reserves are ‘Free Reserves’ that are available for distribution as profits.

4)     CAPITAL RESERVES

-        Not available for distribution among shareholders as dividends. They are created to strengthen the financial position of the company.

-        Capital reserves are built out of capital profits and not out of business profits, such as:

o   Profit prior to incorporation;

o   Premium on issue of shares or debentures;

o   Profit on redemption of debentures;

o   Profit on forfeited shares;

o   Profit on sale of fixed assets; and

o   Profit on revaluation of fixed assets.

5)     VALUATION OR ASSETS RESERVES

-        Set up to offset the loss of value of some assets such as

o   Plant and machinery,

o   Accounts receivables,

o   Investments,

o   Marketable securities and

o   Patents and intangibles

-        Which have a limited life

Objectives:

o   To restore the integrity of investments which they have suffered or loss in value;

o   To recognize expenses this cannot be determined accurately;

o   To reduce assets to their estimated realizable values;

o   To provide for losses arising out of bad debts;

o   To provide for losses arising out of obsolescence.

6)     PROPRIETARY RESERVES

-        Elements of ‘padded surplus’ and are also referred to as surplus or ‘net worth reserves’.

-        A part of shareholders equity which may be set up for the following purposes:

o   To provide cushion against future risks;

o   To offset subjectivity in determination of profits;

o   To reduce free surplus available for distribution to shareholders as dividends;

o   To provide for future expansion and growth;

o   To provide for repayment of debt; and

o   To increase the real value of the firm

-        There are many kinds of proprietary reserves, which include:

o   Reserve for dividend i.e. Dividend Equalization Fund;

o   Reserve for contingencies;

o   Reserve for working capital;

o   Reserve for improvement; and

o   Reserve for insurance, etc.

7)     LIABILITY RESERVES

-        For current as well as emergency liabilities. Current Liabilities are known and are sure to materialize but the extent of the liability or the amount due is not certain. Reserve for taxation is an important example of such reserves. Emergency liabilities, on the other hand, may be non-recurring which may be established through transfer from contingency reserves

8)     FUNDED RESERVES

-        A reserve does not mean cash or fund. It is merely a surplus appropriation that is included in shareholders’ equity. A fund is an actual asset in the form of cash or other investments. When the amount of reserve is invested in securities, etc., it is called funded reserve or ‘reserve fund’. A funded reserve protects the working capital position of the
company and ensures the availability of funds as and when needed.

9)     SINKING FUND RESERVES

-        A sinking fund is a fund built up by regular contribution/appropriation out of profits and the amount of interest on such contributions and the interest itself. The purpose of sinking fund may be either payment of a liability on a certain day in future or accumulation of funds to replace wasting assets.

10)  SECRET RESERVES

-        A secret reserve is a surplus which although exists in a business but is not disclosed in the balance sheet. The management, to be conservative, may write down the value of the assets below their fair value for the purpose of creating a secret or ‘hidden reserve’.

-        Secret reserves may be created by the simple method of showing profits at a figure much lower than the actual. When secret reserves exist, the financial position of the business is much better than what appears from the balance sheet.

Methods of Creating Secret Reserves:

Secret reserves may be created by any of the following methods:

o   Writing off excessive depreciation;

o   Charging capital expenditure as revenue expenditure;

o   An understatement of income;

o   An undervaluation of closing stock;

o   An undervaluation of assets;

o   An overstatement of liabilities;

o   Capitalizing revenue receipts; and

o   Showing contingent liabilities as actual liabilities.

o   Sometimes secret reserves may arise themselves, e.g., increase in the value of assets.

Advantages of Secret Reserves:

o   It is a means for stabilizing dividends;

o   It ensures better financial position;

o   It helps to hide out profits from the existing and potential competitors;

o   It acts as a cushion during the rainy days, and save business from collapse; and

o   It increases the actual capital employed in the business and improves the profitability.

Disadvantages of Secret Reserves:

o   Balance sheet does not reveal the true and fair position of the business;

o   Investors cannot make their buying and selling decisions correctly;

o   Management can conceal its inefficiency;

o   It provides an opportunity to the management for manipulation and misuse of the company’s funds.