A company needs capital quickly and does not want the valuation report, the special resolution and the 60-day clock that come with a private placement. The rights issue exists for exactly this. Offer the new shares to your existing shareholders in proportion to what they already hold, and because nobody who participates is diluted, the law keeps the process light.
A rights issue under Section 62(1)(a) offers new shares first to existing equity shareholders in proportion to their holding, needs only a board resolution, and runs on an acceptance window of not less than 15 and not more than 30 days.
The bottom line
Who gets the offer: all existing equity shareholders, in proportion to their paid-up holding, through a letter of offer.
Approval: a board resolution generally suffices. No special resolution, which is the main advantage.
Window: 15 to 30 days to accept, and the offer carries a right of renunciation unless the Articles say otherwise.
What a rights issue is
An issue of further shares offered first to existing equity shareholders, in proportion as nearly as circumstances allow to their paid-up shareholding, by sending a letter of offer.
It enacts the pre-emptive right: the principle that current owners should be able to hold their percentage before outsiders come in. It applies to all companies, private and public.
The trade-off is the one to understand before choosing it. You must offer to everyone proportionately first. You cannot simply hand the shares to one favoured investor, which is what private placement is for.
Why it is lighter than private placement
Because a proportionate rights issue dilutes nobody who takes up their rights, the Act does not load it with the safeguards a selective allotment carries.
| Requirement | Private placement (s.42) | Rights issue (s.62(1)(a)) |
|---|---|---|
| Special resolution | Yes | No — board resolution generally suffices |
| Valuation report | Yes (except NCDs) | Not mandated (board sets price) |
| PAS-4 offer letter | Yes | No (a plain letter of offer; no prescribed format) |
| Separate bank account | Yes | Not required |
| Prospectus | — | Not required (Section 23(2)) |
That lighter footprint is why rights issues are the default when timing matters.
The window, and renunciation
Under Section 62(1)(a)(i), the letter of offer must specify the number of shares offered and give not less than 15 days and not more than 30 days to accept. Under 62(1)(a)(ii), a shareholder who does not accept within that time is deemed to have declined. A private company may use a shorter window where its members agree, under the relevant exemption.
Unless the Articles provide otherwise, the offer includes a right of renunciation. A shareholder can pass their entitlement wholly or partly to another person, including a third party.
That is what lets a shareholder who is short of cash still capture the value of their rights rather than watching them lapse.
Unsubscribed shares
Where shares go unsubscribed — declined and not renounced — Section 62(1)(a)(iii) allows the Board to dispose of them in a manner not disadvantageous to the shareholders and the company, including by allotting them to non-members.
The common and defensible practice is to invite participating shareholders to apply for additional shares, then distribute the unsubscribed portion among them equitably. That keeps the disposal visibly non-disadvantageous rather than requiring the Board to argue it later.
The process and filings
- Board meeting to approve the rights issue, the ratio, the price and the record date, and to approve the letter of offer.
- Dispatch the letter of offer to all existing equity shareholders.
- Collect acceptances, renunciations and rejections across the 15 to 30 day window.
- Board meeting to approve the allotment.
- File the return of allotment in Form PAS-3 within 30 days of allotment, under Section 39 and Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
- Issue share certificates within 2 months and update the Register of Members.
Listed companies must additionally comply with SEBI's ICDR Regulations, covering the record date, the abridged letter of offer and the rest.
A worked example
A company with two shareholders — A holding 60% and B holding 40% — wants to raise ₹50 lakh. It offers rights in a 1:2 ratio at a set price, by board resolution and a letter of offer with a 20-day acceptance window.
A takes up the full entitlement. B is short of cash, renounces half of hers to an incoming investor, and lets the rest lapse. The Board allots the lapsed portion to A, who had applied for additional shares, on a non-disadvantageous basis, files PAS-3 within 30 days and issues certificates within two months.
No special resolution, no valuation report. Proportionate fairness and clean paperwork carried the whole thing.
Common mistakes
- Treating it as a preferential allotment. A rights issue must go to all existing shareholders proportionately first.
- Getting the entitlement ratio wrong. Verify the shareholding data before drafting, because a wrong ratio undermines the entire offer.
- Setting an acceptance window outside 15 to 30 days, which the section bounds.
- Mishandling renunciation by giving shareholders no clear instructions or timeline for it.
- Missing PAS-3, or filing it without reconciling the numbers first.
A working routine
- Confirm the Articles permit a rights issue, and renunciation if relevant.
- Pass the board resolution fixing the ratio, price, record date and letter of offer.
- Dispatch the letter of offer to all existing equity shareholders.
- Run the 15 to 30 day window and capture acceptances and renunciations.
- Pass the allotment resolution, and deal with unsubscribed shares non-disadvantageously.
- File PAS-3 within 30 days, issue certificates within 2 months, and update the register.
Frequently asked questions
Does a rights issue need a special resolution? No. For a proportionate offer to existing shareholders, a board resolution generally suffices.
Can shareholders sell their rights? Yes. Unless the Articles say otherwise, the offer includes a right of renunciation, exercisable wholly or partly and including in favour of third parties.
What if a shareholder does not respond? After the window closes it is deemed declined, and the Board may dispose of the unsubscribed shares in a manner not disadvantageous to the company and its shareholders.
Is a valuation report required? The Companies Act does not mandate one for a rights issue. The Board fixes the price, at par, premium or discount. Listed companies follow SEBI pricing norms.
What is the filing after allotment? Form PAS-3, within 30 days of allotment.
Can we exclude a shareholder we would rather not have? Not through a rights issue. The offer must go to every existing equity shareholder in proportion.
Primary sources
- Sections 62(1)(a) and 23(2), Companies Act, 2013
- Section 39 and Rule 12, Companies (Prospectus and Allotment of Securities) Rules, 2014
- SEBI (ICDR) Regulations for listed companies