Rights issues can’t be made as per firm’s own wish. These standard guidelines for a company’s rights issue are mandatory for its success.
Rights issue is a cost-effective issue to raise funds for the company from existing shareholders. In this issue, additional new shares are offered to existing shareholders in proportion to their shareholdings on record date.
A huge discount offered in subscription price can make the issue quite attractive for the investors. It is the reason why rights issue of good companies is subscribed completely & successfully.
But, a firm can’t bring rights issue as per its own wish. Rights issue should always proceed after meeting certain mandatory standards or requirements.
These basic standards are often led down by stock exchange regulators such as SEC in US or SEBI in India. Here are 15 legal guidelines of stock exchange regulators regarding rights issue:
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(1) Applicability Of Guidelines For Rights Issue
It is one of the most standard guidelines for a company’s rights issue. Rights issue is a method of raising funds for publicly listed companies only. These companies must have equity capital listed in a stock exchange.
However, companies with listed equity capital can bring rights issue in any forms. It can be in form of stocks, plain vanilla bonds, convertible bonds, warrants, preferential shares, debentures, or even a combination of any of these forms.
On the other hand, company whose debentures or bonds are listed in the market but not the equity or shares will not be governed by those guidelines. Similarly, these guidelines are not applicable where the size of rights issue is below certain threshold levels.
For example, in India, these guidelines are not applicable for rights issue below Rs 50 lakhs. In case of rights issue where aggregate value of securities being offered is less than Rs 50 lakhs, the company shall prepare letter of offer in accordance with disclosure requirements.
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