Understanding Right Issue under the Companies Act 2013

Right issue is a method used by companies to raise additional capital by offering existing shareholders the opportunity to purchase new shares at a discounted price. This process is governed by the Companies Act 2013 in India, which outlines the rules and regulations that companies must follow when issuing new shares to their shareholders.

What is Right Issue?

A right issue is a way for companies to raise funds without having to seek external investors. By offering existing shareholders the chance to purchase additional shares at a discounted rate, companies can generate capital quickly and efficiently. Shareholders are typically given the right to purchase new shares in proportion to their existing holdings, ensuring that their ownership in the company is not diluted.

How Does Right Issue Work?

When a company decides to conduct a right issue, they must first obtain approval from their board of directors and shareholders. Once the right issue is approved, the company will issue a public announcement detailing the terms of the issue, including the number of shares being offered, the price at which they will be sold, and the deadline for shareholders to exercise their rights. Shareholders who wish to participate in the right issue must submit an application and payment for the new shares within the specified timeframe. If they choose not to exercise their rights, they can sell their rights to other investors or allow them to expire.

Advantages of Right Issue

• Retaining Control: By offering shares to existing shareholders, companies can avoid diluting the ownership stake of current investors and maintain control of the company.
• Quick Capital Infusion: Right issues allow companies to raise funds quickly and efficiently, without the need to courting new investors or obtaining regulatory approvals.
• Discounted Pricing: Shareholders are typically offered new shares at a discounted price, making the right issue an attractive investment opportunity.

Disadvantages of Right Issue

• Shareholder Dilution: While the right issues can help companies raise capital, they can also lead to shareholder dilution if existing investors do not exercise their rights.
• Limited Investor Base: Right issues are only open to existing shareholders, which can limit the pool of potential investors and impact the success of the issue.
• Market Perception: The announcement of a right issue can sometimes be viewed negatively by the market, leading to a decline in the company's stock price.In conclusion, right issues are a useful tool for companies looking to raise capital quickly and efficiently. By offering shares to existing shareholders at a discounted price, companies can generate funds without diluting their ownership stake or seeking external investors. However, it is important for companies to consider the potential drawbacks of right issues, such as shareholder dilution and limited investor base, before deciding to proceed with this method of fundraising.