Right Shares-Meaning,Understanding,Example,Steps,Underwriting of Right Shares,Advantage and Disadvantage (Commerce Achiever)

Right shares are those shares which are issued to existing shareholders. According to section 81 of Indian company act 1956, “Company can issue right shares only after the two years of creation of company or one year of first issue of shares which ever is earlier.”

Steps for issuing right shares

1st Step: Right shares must be in ratio of equity shares of existing shareholders.

2nd Step: Right Issue by 15 days notice

Right shares will be issued with 15 days notice. This notice will be offer. Existing shareholders can either accept or reject this offer.

3rd Step: Right shares issue must not be opened more than 60 days under SEBI guidelines.
Provision of 81 will not apply on private company. This rule will not also apply on conversion of debentures into shares.

Benefits of Issuing Right Shares

1. More control on existing shareholders

Because right shares are issued to existing shareholder, so there is no risk of losing of control of existing shareholders. Existing shareholders’ share will increase in company and they can take decision without any compromise with the principles of company. It is very helpful to achieve the missions of company.

2. No loss to existing shareholder

By issuing shares to existing shareholders, value of share will increase due to stability in controlling power of company. So, there will not be any loss to existing shareholders with right shares.

3. No cost for issuing shares to public

Company has not to give any invitation to public, so advertising cost and other new issue cost will decrease with right shares.

4. Helpful to increase the goodwill of company

It is also way to increase the goodwill and reputation of company in industry.

5. Capital formation

Company can get capital at any time without any delay because company can easily issue of shares to existing shareholders just sending right shares offer notice.

6. More scientific

Distribution technique of right shares issue is more scientific. Not all shares will get by single shareholders but it will be in the proportion of existing shares which is in the hand of old shareholders at this time.

For Example

A company is planning to raise funds by making rights issue of equity shares to finance its expansion. The existing equity share capital of the company is Rs. 50, 00,000. The market value of its share is Rs. 42. The company offers to its share the right to buy 2 shares at Rs. 11 each for every 5 share held. You are required to calculate:

1. Theoretical market price after right issue

2. The value of right

3. % increase in share capital

Solution

Market value of 5 shares already held by a shareholder @ Rs. 42 = 210

Add the price to be paid by him for acquiring 2 more shares@ Rs. 11 per share = 22

Total Rs. 232

1. Theoretical market price of one share = 232/7 = Rs. 33.14

2. Value of Right = Market price – theoretical market price = 42- 33.14 = 33.86

3. % increase in share capital

Present capital = 50, 00,000

Right issue Rs. 50, 00,000 X 2/5 = 20, 00,000

% increase in share capital = 20, 00,000 / 50, 00,000 X 100 = 40%

Underwriting of Right Shares

Sometime, company can contract with underwriter who promises that if existing shareholders will not buy, he will takeover all not right shares. Underwriters and sub-underwriters may be financial institutions, stock-brokers, major shareholders of the company or other related or unrelated parties.