Rights Issue

CHAPTER III - RIGHTS ISSUE

PART I: ELIGIBILITY REQUIREMENTS

Regulation 60. Reference Date

• Compliance Requirements for Rights Issue

  1. An issuer making a rights issue of specified securities must comply with the conditions prescribed under this Chapter.

  2. This compliance must be ensured at two separate stages:

     1. When filing the draft letter of offer with the stock exchange(s).

     2. When filing the final letter of offer with the Board and stock exchange(s).

  3. If another provision of this Chapter specifically provides a different requirement, that specific provision will apply.

• Example:

  1. The issuer prepares a draft letter of offer for a rights issue.

  2. At the time of filing it with the stock exchange(s), the issuer must satisfy the applicable requirements of the Chapter.

  3. Later, when the letter of offer is filed with SEBI and the stock exchange(s), the issuer must again satisfy the applicable requirements.

Regulation 61. Entities not eligible to make a rights issue

• Ineligibility for Rights Issue

• An issuer cannot make a rights issue of specified securities if any of the following conditions exist:

  1. (a). Issuer/promoters/promoter group/directors debarred by SEBI:

     1. The issuer, any promoter, promoter group member or director is debarred by SEBI from accessing the capital market.

     2. In such a case, the issuer is not eligible for a rights issue.

  2. (b). Promoter/director connected with another debarred company:

     1. Any promoter or director of the issuer is also a promoter or director of another company.

     2. That other company must be debarred by SEBI from accessing the capital market.

     3. If so, the issuer becomes ineligible for the rights issue.

  3. (c). Promoter/director is a fugitive economic offender:

     1. Any promoter or director of the issuer is a fugitive economic offender.

     2. In such a case, the issuer cannot make the rights issue.

  4. (d). Equity shares suspended from trading:

     1. The issuer’s equity shares are suspended from trading as a disciplinary measure.

     2. The suspension must exist on the reference date.

     3. If so, the issuer is not eligible to make the rights issue.

• Example:

  1. A company wants to make a rights issue.

  2. One of its directors is debarred by SEBI from accessing the capital market.

  3. The company will not be eligible to make the rights issue.

• Explanation:

  1. Exception for Expired SEBI Debarment

     1. The restrictions under clauses (a) and (b) do not apply where the SEBI debarment period has already ended.

     2. This applies to the persons or entities covered under clauses (a) and (b).

        1. The debarment must have occurred in the past.

        2. The entire period of debarment must be over before the draft letter of offer is filed with the stock exchange(s).

        3. Therefore, a past debarment by itself does not make the issuer ineligible if the debarment period has already expired by the filing date.

Regulation 62. General conditions

62(1).

• The issuer making a rights issue of specified securities shall ensure that:

• (a).

  1. In-Principle Approval and Designated Stock Exchange

     1. The issuer must apply to one or more stock exchanges for in-principle approval to list its specified securities.

     2. “In-principle approval” means the stock exchange gives its initial approval for the proposed listing, subject to fulfilment of applicable requirements.

     3. The issuer must choose one of these stock exchanges as the designated stock exchange.

     4. The selection of the designated stock exchange must be made in accordance with Schedule XIX.

• (b).

  1. Existing Partly Paid-up Equity Shares

     1. All existing partly paid-up equity shares of the issuer must have either been fully paid-up or forfeited.

     2. Therefore, the issuer cannot have any existing partly paid-up equity shares remaining in their partly paid-up status.

     3. There are only two permitted outcomes:

        1. The shareholders pay the remaining amount, making the shares fully paid-up or

        2. The issuer forfeits the partly paid-up shares according to the applicable requirements.

  2. Example:

     1. The issuer has 10,000 partly paid-up equity shares.

     2. Before making the rights issue:

        1. All 10,000 shares are fully paid-up or

        2. The shares are validly forfeited.

     3. The issuer cannot proceed while those shares continue to remain partly paid-up.

• (c).

  1. 75% Financing Arrangement for the Project

     1. If the rights issue is being used to fund a specific project, the issuer must already have firm financing arrangements for at least 75% of the project’s stated financing requirement.

        1. These financing arrangements must be made through verifiable means.

        2. The 75% is calculated on the stated means of finance for the specific project.

        3. The proposed rights issue amount is excluded while calculating the 75%.

     2. Existing identifiable internal accruals are also excluded from the amount to be covered by the 75% financing arrangement.

  2. Example:

     1. Total stated project cost: ₹100 crore.

     2. Proposed rights issue: ₹30 crore.

     3. Existing identifiable internal accruals: ₹10 crore.

     4. The remaining project financing is ₹60 crore.

     5. The issuer must have firm and verifiable financing arrangements covering at least 75% of the applicable financing requirement.

• Explanation:

• For this regulation, “finance for the specific project” means financing only the capital expenditure of the project.

  1. Capital expenditure means expenditure incurred to create, acquire or improve long-term assets of the project.

  2. Therefore, the 75% financing requirement relates only to the project’s capital expenditure.

  3. It does not include ordinary operating or revenue expenses of the project.

• Example:

  1. Project requires ₹100 crore for construction of a new manufacturing plant.

  2. ₹80 crore is capital expenditure for land, building, machinery, etc.

  3. ₹20 crore is for salaries, electricity, raw materials and other operating expenses.

  4. For this regulation, “finance for the specific project” refers to the ₹80 crore capital expenditure.

62(2).

• Limit on General Corporate Purposes

  1. The amount proposed to be used for general corporate purposes must not exceed 25% of the amount raised by the issuer.

  2. The limit applies to the amount mentioned under the “Objects of the Issue” in:

     1. Draft letter of offer &

     2. Letter of offer.

  3. Therefore, the issuer can use a maximum of 25% of the rights issue proceeds for general corporate purposes.

• Example:

  1. Rights issue raises ₹100 crore.

  2. Maximum amount that can be allocated for general corporate purposes = ₹25 crore.

  3. The remaining ₹75 crore must be used for the other stated objects of the issue.

62(2A).

• 35% Limit for General Corporate Purposes and Unidentified Targets

  1. The issuer can allocate money raised through the issue towards two categories:

     1. (i). General corporate purposes.

     2. (ii). Objects where the issuer has not yet identified a specific acquisition or investment target.

  2. The combined amount allocated to both categories must not exceed 35% of the total amount being raised.

  3. The 35% limit applies to the amounts mentioned in the “Objects of the Issue” in:

     1. Draft offer document.

     2. Offer document.

  4. Therefore, the issuer cannot use more than 35% of the issue proceeds for these two broad/unidentified purposes together.

25% Limit for Unidentified Acquisition or Investment

• The issuer may raise money for an acquisition or investment even when the specific target has not yet been identified.

• However, the amount allocated for such unidentified acquisition or investment cannot exceed 25% of the total amount being raised.

• This amount must be disclosed as an object of the issue in:

  1. Draft letter of offer and Letter of offer.

• The 25% limit applies specifically to the amount meant for unidentified acquisition or investment targets.

Example:

• Total rights issue amount = ₹100 crore.

• The issuer has not identified the company or asset in which it intends to invest.

• Maximum amount that can be raised for this unidentified investment = ₹25 crore.

Exception When Acquisition or Investment Target Is Identified

• The 35% and 25% limits do not apply when the proposed acquisition or strategic investment target has already been identified.

• The issuer must clearly identify the specific acquisition or investment.

  1. The issuer must make suitable and specific disclosures about the proposed acquisition or investment.

  2. These disclosures must be made in: Draft letter of offer and Letter of offer.

  3. The disclosures must be made at the time of filing the offer documents.

Example:

• An issuer plans to raise ₹100 crore for a strategic investment.

• It has already identified the specific company in which it will invest.

  1. The issuer provides specific details about that investment in the draft letter of offer and letter of offer.

  2. The 25%/35% limits for unidentified acquisitions or investments will not apply.

62(3).

• Restriction on Renunciation by Promoters

  1. This restriction applies when the issuer, any promoter, or any director is a wilful defaulter or fraudulent borrower.

  2. In such a case, the promoters or promoter group cannot freely renounce their rights in the rights issue.

  3. They can renounce their rights only in the following cases:

     1. Within the promoter group or

     2. To the specific investor(s) disclosed by the issuer as required under the ICDR Regulations.

  4. Therefore, promoters cannot renounce their rights to any random third party.

• Example:

  1. A promoter is a wilful defaulter.

     1. The promoter receives rights entitlements in the rights issue.

     2. The promoter can renounce those rights to another member of the promoter group.

     3. Alternatively, the rights may be renounced to a specific investor disclosed by the issuer in accordance with the regulations.

  2. The promoter cannot simply renounce them to an undisclosed outside investor.

62(4).

• Rights Issue by an Issuer Having SR Equity Shares

  1. SR equity shares means Superior Rights equity shares carrying superior voting rights.

  2. If the issuer has issued SR equity shares to its promoters or founders, those SR shareholders cannot renounce their rights in the rights issue.

     1. Any SR shares received by such shareholders through the rights issue must remain under lock-in.

     2. The lock-in continues until the SR shares are converted into ordinary equity shares.

     3. Conversion must result in the shares having the same voting rights as ordinary equity shares.

     4. The newly received SR shares must therefore remain under lock-in along with the existing SR equity shares until such conversion.

• Example:

  1. A promoter holds SR equity shares carrying superior voting rights.

  2. The promoter receives additional SR shares through the rights issue.

  3. The promoter cannot renounce those rights.

  4. The additional SR shares remain locked in until they are converted into ordinary equity shares having the same voting rights as ordinary equity shares.