New rules governing rights issues

• The Ministry of Corporate Affairs (MCA) has announced that listed companies that come out with rights issues before July 31 would not be required to notify shareholders about the issue through postal services because of transport restrictions due to the Covid-19 outbreak.

About:

• A rights issue is an offering of shares made to existing shareholders in proportion to their existing shareholding.

• Companies often offer shares in a rights issue at a discount on the market price.

• Rights issues are used by companies seeking to raise capital without increasing debt.

• Shareholders are not obliged to purchase shares offered in a rights issue. However, not participating in a rights issue may dilute their overall stake in the company, as there would be a larger number of outstanding shares of the company post the issue.

• The recent clarification by MCA was issued under Section 62(2) of Companies Act, 2013.

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Mains Paper 3: Economy

Prelims level: rights issues

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