Offer new shares first to your existing shareholders, in proportion to what they already hold. Done right, it's the fastest, lowest-friction way to raise equity — and a board resolution is all the approval it needs.
The offer window: not less than 15 days and not more than 30 days; renunciation is included by default.
A company needs capital quickly and doesn't want the valuation report, special resolution and 60-day clock that come with a private placement. The rights issue exists for exactly this. It honours the pre-emptive principle — existing shareholders get first refusal on new shares in proportion to their stake — and because it doesn't dilute anyone who participates, the law keeps the process light: no special resolution, no PAS-4, no separate bank account. A clean board resolution and a letter of offer do most of the work.
The trade-off: you must offer to everyone proportionately first. You can't simply hand the shares to one favoured investor — that's a different route.
BOTTOM LINE
- Who gets the offer: All existing equity shareholders, in proportion to their paid-up holding, via a letter of offer.
- Approval: A board resolution generally suffices — no special resolution required (a key advantage).
- Window: Acceptance period of 15 to 30 days; the offer carries a right of renunciation unless the AOA says otherwise.
What is a rights issue?
Governs this section: Section 62(1)(a), Companies Act, 2013
A rights issue is the 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 maintain their percentage before outsiders come in. It applies to all companies, private and public.
Why it's lighter than private placement
Governs this section: Section 62(1)(a) vs Section 42
Because a proportionate rights issue dilutes no one who takes up their rights, the Act doesn't load it with the safeguards a selective allotment carries. Compared to private placement, a rights issue typically needs:
| 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 the reason rights issues are the go-to when time matters.
The 15-30 day window and renunciation
Governs this section: Section 62(1)(a)(i) & (ii)
The letter of offer must specify the number of shares offered and give a window of not less than 15 days and not more than 30 days to accept. If a shareholder doesn't accept within that time, the offer is deemed declined. (A private company may use a shorter window where members agree, per the relevant exemption.)
Unless the AOA provides otherwise, the offer includes a right of renunciation — a shareholder can pass their entitlement, wholly or partly, to another person, including a third party. This is what lets a cash-short shareholder still capture value by transferring their rights.
What happens to unsubscribed shares?
Governs this section: Section 62(1)(a)(iii)
If shares go unsubscribed (declined and not renounced), the Board may dispose of them in a manner not disadvantageous to the shareholders and the company — including allotting them to non-members. A common, fair practice is to invite participating shareholders to apply for additional shares, then distribute the unsubscribed portion among them equitably.
The process and filings
Governs this section: Section 39 & Rule 12, Companies (Prospectus and Allotment of Securities) Rules, 2014
- Board meeting: approve the rights issue, ratio, price and record date; approve the letter of offer.
- Dispatch the letter of offer to all existing equity shareholders.
- Collect acceptances, renunciations and rejections over the 15-30 day window.
- Board meeting: approve the allotment.
- File the return of allotment in Form PAS-3 within 30 days of allotment.
- Issue share certificates within 2 months; update the Register of Members.
(Listed companies must additionally comply with SEBI's ICDR Regulations — record date, abridged letter of offer, and so on.)
Worked example
Mini-case — a proportionate raise
A company with two shareholders — A (60%) and B (40%) — wants to raise ₹50 lakh. It offers rights in a 1:2 ratio at a set price, by a board resolution and a letter of offer giving a 20-day acceptance window. A takes up the full entitlement; B is short of cash and renounces half of hers to an incoming investor and lets the rest lapse. The Board allots the lapsed portion to A (who 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 — just proportionate fairness and clean paperwork.
Common mistakes
- Treating it like a preferential allotment. A rights issue must go to all existing shareholders proportionately first; you can't pre-pick one investor.
- Getting the entitlement ratio wrong. Verify shareholding data carefully — a wrong ratio undermines the whole offer.
- Setting an offer window outside 15-30 days. The acceptance period is statutorily bounded.
- Mishandling renunciation. Give shareholders clear instructions and timelines to renounce.
- Missing PAS-3. File within 30 days of allotment and reconcile the numbers before filing.
Checklist
- Confirm the AOA permits a rights issue (and renunciation, if relevant).
- Board resolution: fix ratio, price, record date and the letter of offer.
- Dispatch the letter of offer to all existing equity shareholders.
- Run the 15-30 day window; capture acceptances and renunciations.
- Board resolution for allotment; deal with unsubscribed shares non-disadvantageously.
- File PAS-3 within 30 days; issue certificates within 2 months; update the register.
FAQ
Does a rights issue need a special resolution? No. For a proportionate offer to existing shareholders, a board resolution generally suffices — a key advantage over private placement.
Can shareholders sell their rights? Yes. Unless the AOA says otherwise, the offer includes a right of renunciation, exercisable wholly or partly, including in favour of third parties.
What if a shareholder doesn't respond? After the offer window, it's deemed declined, and the Board can dispose of the unsubscribed shares in a manner not disadvantageous to the company and shareholders.
Is a valuation report required? The Companies Act doesn't mandate one for a rights issue — the Board fixes the price (par, premium or discount). Listed companies follow SEBI pricing norms.
What's the filing after allotment? Form PAS-3 within 30 days of allotment.
Primary sources
- Section 62(1)(a) & Section 23(2), Companies Act, 2013
- Section 39 & Rule 12, Companies (Prospectus and Allotment of Securities) Rules, 2014
- SEBI (ICDR) Regulations — for listed companies
Disclaimer: This article is general information on a fast-changing area of company law, current at the time of writing. It is not legal or professional advice for any specific company. Verify the position against the live MCA rules and consult your company secretary before filing.