Bonus Issue, Rights Issue, and Pre-Emptive Rights in a Listed Company
Orion Pharma Ltd, listed on a recognised exchange, has paid-up equity of INR 20 crore (2 crore shares of INR 10) and free reserves of INR 90 crore, of which INR 25 crore arose from a revaluation of land. It proposes a 1:2 bonus issue, then a rights issue at INR 150 against a market price of INR 220, to fund an acquisition. The promoter group holds 48% and does not intend to subscribe fully. A foreign portfolio investor holds 9% and wants to renounce its rights in favour of a third party. The company's articles are silent on capitalisation of reserves. The record date for the bonus is 12 days after the board meeting.
1. Is the bonus issue permissible in the proposed amount, and what approvals and timing apply?
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The bonus must be tested against the free-reserve definition and the capitalisation rules.
- Eligible reserves. Revaluation reserves are not free reserves for capitalisation. Eligible free reserves are INR 90 crore minus INR 25 crore, i.e. INR 65 crore. Capitalising INR 10 crore (1:2 on INR 20 crore) is comfortably within that, and the issue does not exceed the paid-up capital plus free reserves limit.
- Partly paid shares. A bonus issue cannot be made unless all partly paid shares are fully paid; the facts show fully paid shares, so this is satisfied.
- Board approval and articles. The articles are silent, but a company may capitalise reserves by board resolution if the articles permit; if silent, an ordinary resolution is the safe route. The board must also confirm that the company has not defaulted on statutory dues or on payments to depositors or creditors.
- Timing. The record date must be at least the minimum period after the board meeting prescribed by the listing regulations; 12 days is workable, but the company must give the exchange prior notice and publish the record date.
- Sequence. Complete the bonus before the rights issue, because the rights ratio must be struck on the post-bonus capital.
2. How should the rights issue be priced and structured, and can the foreign portfolio investor renounce its rights?
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- Pricing. INR 150 against a market price of INR 220 is a discount of about 32%. The pricing must be justified by a valuation report, and the letter of offer must disclose the basis. A discount of this size is permitted but must be explained, especially where the promoter group is not subscribing fully.
- Renunciation. A rights entitlement is renounceable unless the articles provide otherwise. The foreign portfolio investor may renounce in favour of a third party, subject to the transferee's eligibility and to the lock-in and sectoral caps. The company must record the renunciation in the letter of offer and the application form.
- Promoter shortfall. If the promoter group does not subscribe fully, the unsubscribed portion can be offered to other shareholders or to the public, but the promoter's intention must be disclosed. A shortfall does not invalidate the issue; it affects the minimum subscription and the underwriting arrangements.
- Approvals. Shareholders' approval by special resolution, exchange approval, and the letter of offer filed with the regulator are required. The issue must open within the prescribed period after the record date and remain open for the minimum number of days.