Rights Issue as a mechanism of fund raising
- Neha Lodaya
- Jul 25, 2024
- 2 min read
Rights Issue is considered as one of the regulatory efficient tools to raise capital / funds by a private limited company. Unlike preferential allotment, which not only requires shareholders’ approval with a special resolution but also a valuation report issued by a registered valuer, Rights Issue requires only a Board Approval. From a shareholder’s perspective too, Rights Issue aims to retain the pre and post shareholding percentages and avoids dilution in voting rights of existing shareholders.
Even when Rights are offered to non-resident shareholders, the Company has to only ensure a parity in the offer price between resident and non-resident shareholders. This eventually translates into the non-applicability of pricing guidelines or requirements to obtain valuation reports.
Nevertheless, given the Finance Act 2023 has widened the scope of “Angel Tax” to apply to foreign investors from non-exempt jurisdictions (like Singapore, Mauritius, Netherlands), a valuation report certifying the "Tax FMV" of the private limited company needs to be obtained as per the Valuation Rules under the Income-tax Act. However, in a landmark announcement during the Union Budget 2024, the Indian government declared the abolition of this tax for all categories of investors, effective from the financial year (FY) 2025-26.
Seperately, in case of disproportionate allotment of Rights (say due to non-subscription, renunciation or lapse of rights by other shareholders), the exercising shareholder may face the brunt of deemed income tax implication by the taxman alleging a value enrichment in his hand due to non-exercise of shares by the other shareholders. While an argument of “transfer of shares” versus “issue of shares” can be taken, given that Tax Tribunals are permitting non-applicability of deemed tax implications only on "proportionate allotment", an inequitable rights allotment indirectly fastens the deemed tax liability on the exercising shareholder based on action/inaction of another shareholder.
