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Rights Issue – Provisions & Accounting Entries

Introduction

Rights Issue is an offer of shares to existing shareholders in proportion to their existing holding.

  • Section 62 of Companies Act, 2013 governs this.
  • Logic: Pre-emptive right. Existing owners should get first refusal to maintain their control % before outsiders are invited.

1. Key Provisions (Section 62)

  1. Offer Period: The offer must be open for min 15 days and max 30 days.
  2. Right of Renunciation: The shareholder has 3 options:
    • Accept: Subscribe to the shares.
    • Reject: Ignore the offer (Offer lapses).
    • Renounce: Sell the "Right" to another person (Renuncee).
  3. Pricing: Usually issued at a price lower than Market Price to make it attractive.

2. Calculation of Value of Right

Since the shares are offered at a discount to market price, the "Right" itself has a monetary value.

Formula:

Value of Right = Market Price (Cum-Right) - Average Price (Ex-Right)

Step 1: Calculate Average Price (Ex-Right)

Avg Price = (Total Value of Old Shares + Total Value of New Shares) / Total Number of Shares

Step 2: Value of Right

Value of Right = Cum-Right Market Price - Ex-Right Average Price

Illustration

Data:

  • Mr. A holds 100 shares. Market Price = ₹150.
  • Company offers 1 Right Share for every 2 shares held.
  • Issue Price = ₹120.

Calculation:

  1. Existing Value: 100 shares x ₹150 = ₹15,000.
  2. New (Right) Shares: (100/2) = 50 shares.
  3. Cost of New Shares: 50 shares x ₹120 = ₹6,000.
  4. Total Value: ₹15,000 + ₹6,000 = ₹21,000.
  5. Total Shares: 100 + 50 = 150 shares.
  6. Ex-Right Price: 21,000 / 150 = ₹140.
  7. Value of Right: 150 (Old MP) - 140 (New Avg) = ₹10.

3. Accounting Entries

Accounting for Rights Issue is simple. It is treated like a normal issue of shares.

1. Receipt of Application:

Bank A/c ...Dr                 (Amount Recd)
    To Share Application A/c       (Amount Recd)

2. Allotment:

Share Application A/c ...Dr    (Amount Recd)
    To Share Capital A/c           (Face Value)
    To Securities Premium A/c      (Premium Amount)

Note: No entry is passed in company's books for "Renunciation" of rights between shareholders.

Exam Notes: Writing the Answer

Question: "Distinguish between Bonus Issue and Rights Issue." (5 Marks)

Answer:

  1. Payment: Bonus is Free. Rights Issue is Paid (though discounted).
  2. Reserves: Bonus uses Reserves (Capitalisation). Rights Issue collects Cash.
  3. Partly Paid: Bonus requires existing shares to be fully paid. Rights Issue has no such rigid rule.
  4. Renunciation: Bonus cannot be renounced. Rights can be renounced.

Summary

  • Target: Existing Shareholders.
  • Price: Discounted (usually).
  • Computation: Value of Right formula is a frequent exam question.
  • Entry: Same as Normal Issue.

Quiz Time! 🎯

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