Pricing of rights shares renounced to non-residents

Foreign investment in India is governed by the Foreign Exchange Management Act, 1999, read with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, as amended from time to time. The regulatory framework and instructions issued by the Reserve Bank of India (RBI) are compiled in the form of a master circular released on 1 July every year.

The above provisions also govern the pricing of fresh issue of shares (including rights issue) or transfer of shares. As the shares are issued by a company, such issuance is further governed by the Companies Act, 2013, and the rules under it. The juxtaposition of price of shares which are issued and allotted to non-residents on the exercise of right of renunciation by existing shareholders (including non-resident shareholders) is analysed below.

The Companies Act

Section 62(1)(a) of the Companies Act, 2013, deals with rights issues, which involve the offer by a company to its existing shareholders to subscribe to further shares at the price mentioned in the offer letter. As no guidelines are provided to determine the price in case of a rights issue, it can be inferred that no pricing restriction applies, unlike the case of a preferential issue, where the share price is required to be determined by the valuation report of a registered valuer and the shares cannot be issued at a price lower than the price determined by the valuation report.

One of the inherent rights of existing shareholders is the right to renounce the offer of further shares in favour of any other person, unless the articles of association of a company have specifically taken away such right. As renunciation is merely passing of the offer from an existing shareholder to another person, such person can only accept the offer on the same terms and conditions as were offered to the one who renounced the offer.

Bhavin Gada is an associate partner and Manendra Singh is an associate at Economic Laws Practice. Tanya Chib, an associate, helped with research and input. This article is intended for informational purposes and does not constitute a legal opinion or advice.