Rights Issue means offering the shares to the existing shareholders in proportion to their shareholding. It is an important mode to raise the funds from existing shareholders.
Rights Issue in legal terms is also called as pre-emption rights of existing shareholders.
REASONS FOR OPTING RIGHTS ISSUE TO RAISE CAPITAL
The Company usually chooses the path of Rights Issue when it needs an additional capital to run the Company but at the same time wants to keep the voting rights of the existing shareholders proportionally balanced.
In other words, it gives pre-emptive rights to existing shareholders to buy new shares of the Company.
Therefore, it is an important mode of raising capital without diluting the ownership of the Company.
RIGHTS ISSUE OF SHARES IN THE U.K.
The Companies Act, 2006 governs the Companies registered in the United Kingdom. It includes the England, Scotland, Wales and Northern Ireland.
Part 17 of Companies Act, 2006 deals with the provisions relating to share capital of the Company including its alteration.
Chapter 03 of Part 17 states about the existing shareholder’s right of pre-emption for the allotment of equity securities.
CHECKLIST FOR RIGHTS ISSUE OF SHARES IN THE UNITED KINGDOM (U.K.)
Now, let’s go through the Rights Issue checklist for the Companies registered in the United Kingdom.
With the help of this checklist, it would be easier to understand the standard procedure of the Rights Issue by the Company incorporated in the United Kingdom.
So, let’s begin the process flow of the Rights Issue of Shares of the Company located at the United Kingdom step by step wise.
Step 01: Check the authorization to allot the shares of the Company
At first, the Company needs to check whether directors have authorization to allot the shares either by articles of the Company or by the Ordinary resolution passed.
If yes, then also verify whether such authorization is within the time limit of 05 years from the date of authorization obtained or authorization renewed.
Step 02: Conduct a Board Meeting
Next step is to conduct a Board Meeting to approve the following agendas:
- Total capital to be raised;
- Rights Issue offer letter;
- Fixation of ratio in which the existing shareholders will be eligible to apply for the shares of the Company;
- Any other matter incidental thereof.
Step 03: Issue Letter of Offer
After the approval of pre-emption Offer Letter, issue the approved Offer Letter to the existing shareholders. Along with the offer letter, also provide the application form as well as other required documents to apply for the Rights Issue. Further, all the documents provided to the existing shareholders should either be in physical or electronic mode.
Step 04: Opening and Closing of Offer Period:
The offer letter must contain the offer period in which the existing shareholders can apply for the Rights Issue of the Company.
The Rights Issue Offer Period to accept or reject or renunciate should be open for at least 14 days.
Step 05: Receiving the applications from existing shareholders during the offer period
During the offer period, the existing shareholders will apply for the Rights Issue by submitting the application forms along with the payable amount.
Maintain the records of applications received during the offer period.
Step 06: Conduct the Board Meeting for allotment of shares
After completion of Rights Issue Offer Period and receiving of applications for the Rights Issue, the next step will be to conduct a board meeting.
In the Board meeting, approve the following agendas by passing the Board Resolution with requisite majority:
- To Approve the Rights Issue applications received;
- To consider the allottees of the issue;
- Authorization of the allotment of shares;
- Authorization for issue of new share certificates for the allotment;
- Submission of Return on Allotment Form to the Company House;
- Authorization to update the register of members and register of allotments;
- Further, any other agenda as required for the allotment of shares.
Step 07: Issuance of new share certificates:
The next step would be the issue of new Share Certificates to the allottees. However, the process of issue of shares must be completed within 02 months from the date of allotment.
Step 08: Submit the return of allotment:
After the allotment of shares, submit the return on allotment to the Company House within the stipulated time limit.
Accordingly, submit the Form SH01 to the Company House within 01 month from the date of allotment.
Step 09: Update the Records
After completion of allotment and filing for the same, update the register of Members and Register of Allotments within 02 Months from the date of Board Meeting approving the allotment.
Timely updation of statutory records is an important tool for good corporate governance.
Step 10: Disclosure of allotment details in the upcoming filing
At last, it is a statutory requirement to disclose the allotment details in the next statutory filings of the Company.
After allotment, make sure to include the details of allotment in the followings:
- In the next Confirmation Statement to be filed after the allotment.
- Include the shareholding details in the upcoming financial of the Company.
Rights Issue is an important mode of raising capital in order to run the Company. It is an important way to increasing the share capital without diluting the stakes of existing shareholders.
For good Corporate Governance, the Company must ensure that all the statutory compliances has been followed effectively and efficiently within the stipulated timeline.
I hope this article would help you to have better understanding relating to the procedure of the Right Issue of Shares in the United Kingdom in a simplest manner.
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Till then let’s try to make all the statutory compliances easier to understand as well as easier to comply!
You can also read about Employee’s perspective towards the organization in the article named “What an Employee Really Wants“.