Further Issue of Share Capital — Rights Issue and Other Routes [Section 62]
# Further Issue of Share Capital — Section 62
## What is a Rights Issue?
A rights issue offers existing securityholders pre-emptive subscription rights to buy additional securities — usually pro-rata to their existing holding. It is a non-dilutive way to raise capital because existing holders maintain their proportional ownership if they subscribe.
## Applicability Across Company Types
Class of Company
Power to Make Rights Issue
Governing Provisions
Listed companies (or those intending to list securities)
Section 23(1)(c)
SEBI Act, 1992 + rules/regulations made thereunder
Public companies (unlisted)
Section 23
Companies Act, 2013 + rules made thereunder
Private companies
Section 23(2)(a)
Companies Act, 2013 + rules made thereunder
## The Three Routes Under Section 62(1)
When a company having share capital proposes to increase its subscribed capital by issue of further shares, those shares must be offered through one of these three channels:
### Route 1 — To Existing Equity Shareholders [Section 62(1)(a)] — Rights Issue
Offered to persons who, at the date of offer, hold equity shares — in proportion to their paid-up capital.
Offer must be made by notice specifying the number of shares offered and a period for acceptance (not less than 15 days, not more than 30 days, after which it is deemed declined).
The offer includes a right of renunciation in favour of any other person, unless Articles say otherwise.
Resolution: Special Resolution + offer through notice.
### Route 2 — To Employees Under ESOP [Section 62(1)(b)]
Issue under an Employee Stock Option Scheme.
Resolution: Special Resolution.
### Route 3 — To Any Person (Preferential Allotment / Private Placement) [Section 62(1)(c)]
Issue for cash or non-cash consideration to any person (whether or not an existing shareholder).
Requires valuation by a registered valuer.
Resolution: Special Resolution.
## At a Glance
Route
To Whom
Authority Required
62(1)(a) — Rights Issue
Existing equity shareholders pro-rata
Special Resolution + Notice
62(1)(b) — ESOP
Employees
Special Resolution
62(1)(c) — Preferential
Any person, cash or non-cash
Special Resolution
## Key Distinctions
A rights issue is a statutory right of existing equityholders — it is pre-emptive and non-dilutive if subscribed.
ESOP and preferential allotment are alternatives that bypass pre-emption — hence the strict Special Resolution requirement and (for preferential) registered valuer involvement.
Worked example
### Example 1
Example 1 — Pro-rata calculation: ABC Ltd has paid-up equity of 10,000 shares. Mr. K holds 500 shares. Company announces a rights issue of 5,000 new shares in the ratio 1:2 (one new for every two held).
Answer: K's pro-rata entitlement = 500 × (1/2) = 250 new shares. He may accept fully, partly, renounce in favour of another, or let the offer lapse.
### Example 2
Example 2 — Renunciation: Same facts as above. K does not wish to subscribe but his friend M is interested. Can K transfer the rights?
Answer:Yes — unless the Articles prohibit. The offer letter under Section 62(1)(a) includes the right to renounce, which K can exercise in favour of M.
### Example 3
Example 3 — Choosing the right route: XYZ Ltd, a public unlisted company, wishes to issue 1 lakh shares to a strategic investor (not an existing shareholder) against contribution of intellectual property.
Answer: This is a preferential allotment under Section 62(1)(c) — non-cash consideration, to a non-existing shareholder. Requires Special Resolution + valuation report from a registered valuer.
⚠️ Common exam mistakes
Treating Section 62 as applying only to public companies — it applies to ALL companies having share capital (subject to provisions of SEBI Act for listed entities).
Believing rights issue offers can lapse silently — they must specify a period of 15–30 days, after which they're deemed declined.
Forgetting that the right of renunciation is a default feature under Section 62(1)(a) — unless Articles say otherwise.
Confusing rights issue (existing shareholders) with preferential allotment (any person) — both raise capital but serve different purposes.
Assuming ESOP and preferential allotment need only an ordinary resolution — both require a Special Resolution.
Overlooking that preferential allotment under Section 62(1)(c) requires a registered valuer's report for both cash and non-cash issues.
Bare-Act text Section 62(1) · The Companies Act, 2013 · click to expand
(1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered — (a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely: (i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined; (ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; (b) to employees under a scheme of employees' stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed; or (c) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer subject to such conditions as may be prescribed.