The document outlines the procedures and legal requirements for rights issues and bonus issues under the Companies Act, 2013, detailing the roles of existing shareholders, board resolutions, and compliance duties. It explains the distinctions between the two types of issues, including timelines for acceptance, documentation needed, and specific tax implications related to receiving shares without consideration. The document emphasizes the necessity for companies to ensure compliance with authorized share capital and various legal requirements prior to conducting these share issues.

1. Rights issue and bonus issue
CS Meenakshi Jayaraman
DVS Advisors LLP
India-Singapore-London-Dubai-Malaysia-Africa
www.dvsca.com

2. Credits and Acknowledgments
Sundar Rajan S

3. Legends used in the presentation
Act Companies Act, 2013
AOA Articles of Association
BOD Board of Directors
FMV Fair Market Value
IFSC International Financial Services Centre
ITA Income Tax Act

4. Presentation Schema
Types of issue Rights issue
Provisions under
the Act
Exceptions
Secretarial
Compliance
Caveats Bonus issue
Reserves to be
utilised and
conditions to be
fulfilled
Secretarial
Compliance
Caveats
Income Tax
implications
Judicial precedents

5. Types of issue
Fund raising
Equity
Public issue
Debt
Rights issue
Private
placement
Bonus issueESOPSweat equity

6. Rights issue
It is the process of raising funds by issuing shares to the existing shareholders of the Company
It means that the existing shareholders have the pre-emptive right to subscribe the shares of the Company in
relation to an outsider
Rights issue can be opted by a Company only in case of further issue of shares and not at the time of first issue
The shareholder has the right to either accept or renounce the offer made by the Company

7. Provisions under the Act – Section 62 (1) & (2)
Board resolution should be passed by the Company for approval of rights issue
Letter of offer containing the terms and conditions of the rights issue along with share application form, renunciation form
and application to be made by renouncee shall be sent to the shareholders
Unless the AOA of the Company otherwise provide, the letter of offer shall contain a statement of right to renounce the
offer by the shareholder in favour of any other person

8. Contd.
Time limit for accepting or renouncing the offer shall be not less than 15 days but not more than 30 days*. If response is not
obtained from the shareholder within this time period, the offer shall be deemed as declined
After the lapse of time period for accepting or renouncing the offer by the shareholder or on receipt of notice from such
shareholder rejecting the offer, the BOD may dispose of those shares in a manner not disadvantageous to the shareholders
and the Company
Letter of offer shall be dispatched through speed/registered post, courier, electronic mode or any other mode having proof
of delivery to all existing shareholders atleast 3 days before the opening of issue**
*However, exception is granted to private and specified IFSC public Companies
** However, exception is granted to private Companies

9. Exceptions
• Lower time limit for accepting or renouncing the offer or dispatching the
letter of offer shall be given to shareholders provided,
• 90% of the members of the Company have given their consent in
writing or in electronic mode
Private Company
• Lower time limit for accepting or renouncing the offer shall be given to
shareholders provided,
• 90% of the members of the Company have given their consent in
writing or in electronic mode
Specified IFSC public
Company
• Provisions of Section 62, on the whole, shall not applyNidhi Company

10. Secretarial Compliance
Notice for Board meeting for
rights issue approval should be
issued to the Directors atleast 7
days before the date of meeting –
Section 173(3)
Issuance of letter of offer and
other documents to shareholders
(Share application, Renunciation
form, etc.)
Board resolution for approval of
rights issue and preparing
minutes of the meeting
File Form MGT-14 within 30 days
of passing BOD resolution –
Section 117(3)(g) read with
179(3)*
Attachments to the Form MGT-14
shall be the certified true copy of
the BOD resolution and offer
letter issued to shareholders
i. For approval of rights issue:
*Exempt for private and specified IFSC public Companies. Hence, Form MGT-14 need not be filed

11. Notice for Board meeting for
allotment of shares should be
issued to the Directors atleast 7
days before the date of meeting –
Section 173(3)
Such Board meeting to be held
within 60 days from the date of
receipt of money from
shareholders
Drafting Board resolution and
minutes for allotment of shares
by rights issue
File Form PAS-3 within 30 days
from the date of allotment of
shares
Mandatory attachments to Form
PAS-3 shall be list of allottees and
certified true copy of BOD
resolution for allotment
Share certificate shall be issued
within 2 months from the date of
allotment
ii. For allotment of shares by rights issue (after receiving money from the shareholders):
Contd.

12. Caveats
Board resolution is sufficient for approval of rights issue. Consent of members in general meeting is not required to be obtained
Prior to rights issue, the Company shall ensure that its authorised share capital is more than the post rights issue paid-up capital. If
not, the Company shall first alter its share capital and then proceed with rights issue. Form SH-7 to be filed
Valuation report is not required to be obtained for issue of shares by rights issue

13. Sample format of documents
i. Share application form

14. Contd.
ii. Renunciation Form

15. Contd. iii. Renouncee application Form

16. Bonus issue
It is the process of issue of additional shares to the existing shareholders without any consideration
It is generally given in proportion to shareholding and dividend rights
It is given to retain the surplus or to build trust amongst the shareholders

17. Reserves to be utilised – Section 63(1)
Bonus shares shall be issued by the Company only out of following reserves*:
1. Free reserves
2. Securities premium account
3. Capital redemption reserve
*In any case, reserves created by way of revaluation of assets shall not be utilised for issue of bonus shares

18. Conditions to be fulfilled – Section 63 (2)
Such issue is authorised by its AOA
Board and members consent has to be obtained in Board and general meeting respectively
Company has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it
Company has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to
provident fund, gratuity and bonus
Partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up
Once recommendation has been given by the Board, it shall not subsequently withdraw the same
The following conditions have to be fulfilled for issue of bonus shares by the Company:
The bonus shares shall not be issued in lieu of dividend

19. Secretarial compliance
Notice for Board meeting for
issue of bonus shares should
be issued to the Directors
atleast 7 days before the date
of meeting – Section 173(3)
Draft resolution and minutes
of BOD meeting for issue of
bonus shares
File Form MGT-14 within 30
days of passing BOD
resolution – Section 117(3)(g)
read with 179(3)*
Prepare notice along with
explanatory statement for
convening general meeting
Draft resolution and minutes
of general meeting of
members for approval of
bonus issue
File Form PAS-3 within 30
days of passing BOD
resolution for allotment of
shares with list of allotees and
BOD resolution as mandatory
attachments
*Exempt for private and specified IFSC public Companies. Hence, Form MGT-14 need not be filed
Shares certificate shall be issued within 2 months from the date of allotment

20. Caveats
Bonus shares shall not be issued in lieu of dividend
Special resolution is not required to be passed in general meeting of members for approval of bonus issue.
Ordinary resolution is sufficient
Unlike rights issue, there is no option for renunciation of bonus shares
Prior to bonus issue, the Company shall ensure that its authorised share capital can accommodate the post bonus issue paid-up
capital. If not, the Company shall first alter its share capital and then proceed with bonus issue. Form SH-7 to be filed

21. Tax implications under ITA
Property being shares of a Company, received by a person, without consideration, whose value exceeds Rs.
50,000 is chargeable to tax in the hands of the recipient
Entire FMV of shares is chargeable to tax and not difference between FMV and Rs. 50,000
Hence, in case of any person who receives bonus shares whose FMV exceeds Rs. 50,000, is chargeable to tax
since bonus shares are received for nil consideration

22. Judicial Precedents
Vestal Educational Services (P.) Ltd. vs. Lanka Venkata Naga Muralidhar - [2018] 100 taxmann.com 286 (NCL-AT)
Amount lent by shareholder to company to repay loan had been converted into equity without his knowledge, intimation or
authorization
Appellant claimed that allotment was done on basis of decision taken in board meeting where offer was made regarding issue
of equity shares at par on right issue basis to existing shareholders and respondent was shown as entitled/offered shares
However, company had not produced any evidence with regard to issue of notice offering shares to respondent or any other
shareholder and its acceptance by respondent
Thus, NCLAT held that impugned order passed by NCLT declaring said allotment to be null and void, was correct

23. Thank You
DVS Advisors LLP
India-Singapore-London-Dubai-Malaysia-Africa
www.dvsca.com
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