Rights Issue of Finance

Rights Issue of Finance: It is an invitation to the existing shareholders to subscribe for further
shares to be issued by a firm. A right simply means an option to buy certain securities at a
certain privileged price within a certain specified period. The Company Act, 1956 lays down the
manner in which further issue of shares, whether equity or preference, is to be made so as to
ensure equitable distribution of shares without disturbing the established equilibrium of
shareholding in the company. According to Section 81 of the Companies Act, whenever a public
limited company proposes to increase its subscribed capital by the allotment of further shares,
after the expiry of two years from the formation of the company or the expiry of one year from
the first allotment of shares in the company, whichever is earlier, the following conditions or
procedure must be followed:
1. Such shares must be offered to holders of equity shares in proportion, as nearly as
circumstances admit, to the capital paid-up on those share.
2. The offer must be made by giving a notice specifying the number of shares offered.
3. The offer must be made to accept the shares within a period specified in the notice being
not than 15 days.
4. Unless the articles of association of the company provide otherwise, the notice must also
state that the shareholder has the right to renounce all or any of the shares offered to him
in favor of his nominees.