Rights Issue: Entitlement, Renunciation and Extra Allotment
Kirti Software Ltd has 40 lakh equity shares of ₹10 each. It needs ₹9 crore and proposes a rights issue of 1:2 at ₹45 per share, raising 20 lakh shares. The letter of offer is dated 1 July and the issue opens on 11 July; the board fixed a 10-day acceptance period because a large order is waiting. Meera holds 4,000 shares. She renounces 600 of her entitlement in favour of her nephew, accepts the balance, and applies for 1,000 additional shares. Total applications, including additional applications, are 22 lakh shares against 20 lakh offered; additional applications alone total 4 lakh shares. The board wants to allot all extra shares to the promoter group, which has applied for 1.5 lakh additional shares, and reject Meera's extra request. A shareholder objects that the acceptance period is too short.
1. Calculate Meera's rights entitlement, the number of shares she accepts, and her additional allotment if the excess 2 lakh shares are allotted pro-rata to additional applications.
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Entitlement = 4,000 × 1/2 = 2,000 rights shares.
Renounced = 600. Accepted by Meera = 2,000 - 600 = 1,400 shares. The renouncee must apply separately for 600 shares and pay ₹45 per share; if the renouncee does not apply, the board may deal with those shares under the articles and the offer terms.
Excess applications = 22 lakh - 20 lakh = 2 lakh shares. Additional applications = 4 lakh shares. Pro-rata additional allotment = 1,000 / 4,00,000 × 2,00,000 = 500 shares.
Meera's total = 1,400 + 500 = 1,900 shares, plus the 600 renounced shares allotted to the renouncee if that application is valid.
2. Is the 10-day acceptance period valid? What should the company secretary advise the board to do?
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No. Section 62(1)(a) requires a rights offer to remain open for not less than 15 days and not more than 30 days from the date of the offer. A 10-day acceptance period is short. The opening date of 11 July does not cure the defect.
The company secretary should advise the board to extend the acceptance period to at least 15 days and issue a revised letter or notice to all eligible shareholders. If allotment is made on the short period, a single objecting shareholder can create litigation risk. Urgency is not a legal substitute for the statutory minimum.
3. Can the board allot all additional shares to the promoter group and reject Meera's extra application? Explain the correct approach.
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The board has discretion over unsubscribed or additional shares, but that discretion must be exercised fairly, in good faith, and for the company as a whole. Allotting all 2 lakh extra shares to promoters while rejecting Meera's 1,000-share application is discriminatory and difficult to defend.
A defensible method is pro-rata allotment to all additional applicants, or pro-rata to existing holding if the articles permit, with the basis recorded in the board minutes. Meera's renunciation to her nephew is valid because a rights entitlement includes a right to renounce; the renouncee must complete KYC and pay. The board should also check whether the promoter group's extra allotment would change control or trigger disclosure obligations.