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Security Analysis and Portfolio Management
Notes The investor's bank account would get debited only after the shares/debentures allotted.
In respect of unsuccessful applicants, the funds continue to remain in their account and
earn interest if the account is a savings or a term deposit. The excess application money of
partly successful applicants also, will remain in their accounts. There will be lien on the
funds for a maximum of four months period. The stockinvest is intended to be utilised
only by the account holders and it should not be handed over to any third party for use. In
case the cancelled/partly utilised stockinvest is not received by an investor from the
Registrar, lien will be lifted by the issuing branch upon expiry of four months from the
date of issue against an indemnity bond from the investor.
4. Rights Issues: If an existing company intends to raise additional funds, it can do so by
borrowing or by issuing new shares. One of the most common methods for a public
company to use is to offer existing shareholders the opportunity to subscribe further
shares. This mode of raising finance is called 'Rights Issues'. The existing shareholders
have right to entitlement of further shares in proportion to their existing shareholding.
The rights of entitlement of a shareholder, who does not want to buy the right shares, can
be sold to someone else. The price of rights shares will be generally fixed above the
nominal value, but below the market price of the shares. The issue of quoted shares at
below the nominal value is not allowed, and it would be rare for this to happen for
unquoted shares. Section 81 of the Companies Act provides for the further issue of shares
to be first offered to the existing members of the company, such shares are known as 'right
shares' and the right of the members to be so offered is called the 'right of pre-emption.'
Section 81 of the Companies Act, 1956 deals with the provisions relating to rights issues.
(a) Any company
(i) Which has completed two years after its incorporation or
(ii) Which has completed one year from the first allotment of shares after its
incorporation
(b) Whichever is earlier, if it proposes to increase its subscribed capital by allotment of
further shares, then the subsequent provisions shall apply.
(c) Those further shares shall be first be offered to the existing shareholders in proportion
to the shares held by them in the paid up capital, on the date of such offer.
(d) At least 15 days notice shall be given from the date of offer. The notice shall specify
the number of shares offered and the limiting time of the offer.
(e) The notice shall mention that if the offer is not accepted within the time of offer, will
be deemed to have been declined.
(f) Unless the articles of the company otherwise mention, such offer has the right of
renunciation.
(g) The notice of offer shall contain a statement a renunciation.
(h) If it is declined to accept the offer, the board of directors may dispose of those shares
in such manner, as they deem most beneficial to the company.
Reasons for a Rights Issue
The main reasons of making a rights issue by a company are as follows:
(a) In times of inflation, the replacement costs of assets will be high; unless the company
can retain cash from substantial profits, the only alternative is to raise cash from a
fresh issue of shares.
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