12.6.13 (Rights Shares)

The existing members of the company have a right to be offered shares, when the company wants to increase its subscribed capital. Such shares are known as "right shares" but they are not issued free of charge.

Section 81 provides that where at any time after the expiration of two years from

the date of incorporation of the company or after one year from the date of the first allotment of shares, whichever is earlier, a public company limited by shares, issues further shares within the limits of the authorised capital, its directors must first offer these shares to the existing holders of equity shares in proportion, as nearly as circumstances admit, to the capital paid up on their shares at the time of the further issue. The company must give notice to each of the equity shareholders, giving him the option to buy the shares offered to him by the company. The shareholders must be informed of the number of shares he has the option to buy. He must be given at least fifteen days to decide whether he would exercise his option or not. If the shareholder does not inform the company of his decision, he shall be deemed to have declined the offer. Unless the articles of the company otherwise provide, the directors must state in the notice of offer the fact that the shareholder has also the right to renounce the offer, in whole or part, in favour of some other person who need not be member of the company. If the shareholder declines or is deemed to have declined or if the person in whose favour the renunciation is made declines to buy the shares, the company's directors may dispose of those shares in such manner as they may think fit.

Exceptions. However, the company may, by special resolution in general meeting,

decide that the directors need not offer the shares in the further issue to the existing  equity shareholders and that they may dispose them off in any manner whatsoever. But where, it has been possible to muster ordinary majority only, the directors may

not offer the shares to the existing equity shareholders, if permission is obtained from the Central Government. Further, s.81 does not apply to a private company. Thus, a private company need not offer its further issue first to existing shareholders. Directors are free to offer them in the manner they deem fit. Further, s.81 is not applicable in the case of issue of shares against conversion of loans or debentures.

SEBI has issued guidelines regarding Rights Issues.

Duty of transferor to transferee in respect of rights shares. There may be pending transfers at the time when a rights issue takes place. This raises the question whether the transferor of an unregistered transfer is under any obligation towards his transferee to apply for the rights shares for the benefit of the transferee. The Supreme Court in

R, Mathalone v. Bombay Life Assurance Co. Ltd. AIR 1953 SC 385 has observed that after the transfer form has been executed, the transferor cannot be held to undertake any additional financial burden in respect of the shares at the instance of the transferee where, after the transfer of shares, but before the company had registered the transfer, the company offered rights shares to its members. The transferor could not be compelled by the transferee to take up on his behalf the rights shares offered to the transferor and all that he could require the transferor to do was to renounce the rights issue in the transferee's favour.

Allotment to renouncee. As per s.8(1)(c), unless the Articles of the company otherwise provide, the letter of offer of rights shall be deemed to include a right to renounce the shares offered to a member in favour of any other person; and the notice sent to him must contain a statement to this effect. When a shareholder renounces any of the rights shares offered to him, in favour of third person, it is not in the nature of transfer of such shares. The Board of Directors, therefore, cannot refuse to allot the shares to the renouncee unless the Articles so provide - Re Simo Securiries Trust Ltd. (1972) 42 Comp. Cas.457.

However, the right to renounce shares is not available to members of a s.43A company even to the limited extent of renouncing in favour of other members. The Articles of a company may contain provisions enabling members to transfer shares to each other, but that is different from a renunciation of shares - Needle Industries' case (supra).

In the case of shares registered in joint names, any of the joint holders may lodge a letter of renunciation.