Rights Issue under Section explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A rights issue is the default way a company with existing shareholders raises further equity. Section 62(1) makes it presumptive: where you propose to increase subscribed capital, those shares shall be offered to existing equity shareholders in proportion to their holdings — unless you deliberately take a different route.
For a closely held private company it's also by far the cheapest route. No valuation report. No PAS-4. No separate bank account. No special resolution. Just a Board resolution — provided every shareholder gets their proportionate entitlement.
Board resolution only. Offer period of 15–30 days, shortened for a private company where 90% of members consent. Shareholders can renounce unless the articles say otherwise. Unsubscribed shares can be placed by the Board — but only in a way "not disadvantageous to the shareholders and the company", which is where the litigation lives. PAS-3 in 30 days, not 15.
Three routes, and why this one is cheapest
Section 62(1) gives you three ways to issue further shares:
(a) to existing equity shareholders, pro rata — the rights issue; (b) to employees under an ESOP, with a special resolution; (c) to any persons, with a special resolution and a registered valuer's price.
Clause (c) is the preferential allotment route, and in practice it's run through the Section 42 private placement machinery — PAS-4, separate bank account, PAS-3 in fifteen days, no spending until filed.
Clause (a) escapes all of it. A rights issue needs only a Board resolution.
The three conditions attached to a rights issue
(i) The notice period. The offer must specify the number of shares offered and set a period of not less than fifteen days and not more than thirty days, after which an unaccepted offer is deemed declined.
The private company shortcut. Where 90% of the members give consent in writing or electronically, a shorter period applies. A private company with a cooperative shareholder base can run a rights issue in a few days instead of fifteen. That's a genuinely useful relaxation when you need money quickly.
(ii) The right to renounce. Unless the articles say otherwise, the offer is deemed to include a right to renounce the shares in favour of another person — and the notice must say so.
Renunciation matters in a private company. It's how a founder lets one investor take up more than a proportionate share without needing a Section 62(1)(c) special resolution and valuation. But read it against your articles' transfer restrictions — where a transfer needs Board approval, the Board should approve the renunciation too.
(iii) The unsubscribed portion. After the offer period, or on earlier intimation of decline, the Board may dispose of the unsubscribed shares in a manner not disadvantageous to the shareholders and the company.
That phrase is doing a lot of work. See the oppression section below.
Despatch: by registered post, speed post, electronic mode, courier or any mode with proof of delivery, to all existing shareholders, at least three days before the issue opens.
Step by step
1. Check your authorised capital. If the issue takes paid-up capital past authorised capital, increase it first:
- confirm the articles permit an increase; if not, alter them by special resolution;
- pass an ordinary resolution in general meeting;
- file Form SH-7 within thirty days, with stamp duty on the increase.
2. Board meeting. Approve the issue, the number of shares, the price and the ratio; approve the draft letter of offer; fix the record date; fix the offer period; authorise despatch.
For a private company not in filing default, no special resolution is needed.
3. Despatch the letter of offer to every existing equity shareholder, at least three days before the issue opens, by a mode with proof of delivery. It must state:
- the number of shares offered to that shareholder;
- the price and amount payable;
- the offer period and the deemed-decline date;
- the right of renunciation and how to exercise it;
- the payment mode and bank details.
4. Receive applications and money within the offer period. There's no statutory separate-account requirement here (unlike Section 42), but a distinct account or clearly identified receipts makes the audit trail much cleaner.
5. Board meeting to allot. Allot within a reasonable time. Where a shareholder has renounced, allot to the renouncee. Where shares are unsubscribed, dispose of them under 62(1)(a)(iii) — and document why the disposal isn't disadvantageous.
6. File PAS-3 within thirty days of allotment under Section 39(4). Thirty, not fifteen — the fifteen-day rule is a Section 42 rule.
7. Certificates and registers. Certificates within two months, update the Register of Members, pay stamp duty, and where Rule 9B applies, issue in demat — after confirming promoter, director and KMP holdings are already dematerialised, because Rule 9B(3) otherwise bars the offer entirely. Rule 9B →
The three routes side by side
| Rights issue 62(1)(a) | Preferential 62(1)(c) | Private placement Sec 42 | |
|---|---|---|---|
| Offered to | Existing equity holders, pro rata | Any person | Identified persons, max 200/FY/security |
| Members' resolution | Not required | Special resolution | Special resolution |
| Registered valuer | Not required | Required | Required |
| Offer document | Letter of offer | PAS-4 | PAS-4 |
| Separate bank account | Not required | Required | Required |
| Return of allotment | PAS-3 in 30 days | PAS-3 in 15 days | PAS-3 in 15 days |
| Can use money before PAS-3 | Yes | No | No |
The risk nobody warns you about
A rights issue is the most common vehicle for a Section 241 oppression and mismanagement petition in a private company. The pattern is always the same:
A majority shareholder causes the company to make a rights issue at par, which the minority can't fund. The majority subscribes to the unsubscribed portion. The minority is diluted.
When it reaches the Tribunal, the questions asked are:
- Was there a bona fide need for funds?
- Was the price fair?
- Did the notice period give a real opportunity to subscribe?
- Was the disposal of the unsubscribed portion genuinely "not disadvantageous to the shareholders and the company"?
Practical safeguards: document the funding need in the Board minutes. Use a defensible price even though no valuation is mandated. Give the full statutory notice period unless there is genuine urgency. And where a large unsubscribed block is heading to a promoter, get a valuation and a disinterested approval anyway.
The cost of a valuation report is trivial next to a Section 241 petition.
Key takeaways
- Board resolution only. No special resolution, no valuation, no PAS-4.
- 15–30 day offer period, shortenable for a private company with 90% member consent.
- Renunciation is presumed unless the articles exclude it — and it's how you let one investor take more without a 62(1)(c) route.
- PAS-3 in thirty days, and you may use the money before filing.
- Preferential allotments run through Section 42. Only the pure rights issue escapes that machinery.
- Document the funding need and the price. That documentation is your defence.
Read next
- Private Placement under Section 42
- Share Certificates under Section 46
- Demat of Shares by Private Companies (Rule 9B)
- ESOP in a Private Limited Company
- Exemptions and Carve-Outs for Private Companies
Disclaimer: Positions stated as on 4 September 2026. Issues to non-residents attract FEMA pricing and reporting obligations not covered here. Take professional advice before making an offer.