# Further Issue of Share Capital — Rights Issue & Preferential Allotment (Section 62)

## What is a Rights Issue?

A rights issue offers pre-emptive subscription rights to existing security holders, allowing them to buy additional securities pro-rata to their current holding. It is a non-dilutive way to raise capital.

## Applicability Across Company Classes

Class of Company	Source of Power	Applicable Provisions
Listed companies / companies seeking listing	Section 23(1)(c)	SEBI Act, 1992 + rules & regulations made thereunder
Public companies not listed	Section 23(1)	Companies Act, 2013 + rules
Private companies	Section 23(2)(a)	Companies Act, 2013 + rules

## Three Modes of Further Issue [Section 62(1)]

```

Further Issue of Shares

│

┌───────────────────────┼───────────────────────┐

Rights Issue ESOP — Employees Preferential / Other

s.62(1)(a) s.62(1)(b) s.62(1)(c)

Cash or non-cash

Special Resolution Special Resolution Special Resolution

+ Offer notice

(existing equity (employees) (any person)

shareholders)

```

### Mode 1 — Rights Issue to Existing Equity Shareholders [62(1)(a)]

Offer is made to existing equity shareholders in proportion to paid-up capital.
Requires a Special Resolution AND offer through notice specifying the number of shares offered and timeline.

### Mode 2 — Employee Stock Option Scheme (ESOP) [62(1)(b)]

Issue to employees under an ESOP.
Requires a Special Resolution.

### Mode 3 — Preferential Allotment [62(1)(c)]

Issue to any person for cash or non-cash consideration.
Requires a Special Resolution.
Pricing must follow valuation rules.

## Why Section 62 Matters

Section 62 protects the pre-emptive rights of existing shareholders against dilution. Any further issue must first be offered to them unless one of the other modes (ESOP, preferential, etc.) is approved by special resolution.

## Key Mnemonic

R-E-P: Rights issue → Employees (ESOP) → Preferential / Any person.
All three require Special Resolution.

Worked example

### Example 1

Example 1 — Rights Issue: XYZ Ltd. proposes to issue 1,00,000 additional equity shares. Mr. A holds 5% of existing equity. Under Section 62(1)(a), XYZ Ltd. must offer 5,000 shares to Mr. A first via a letter of offer, with a specified time to accept. He may accept, decline, or renounce his entitlement.

### Example 2

Example 2 — ESOP: ABC Ltd. wants to grant stock options to senior managers. It must pass a special resolution under Section 62(1)(b) before issuing options under the ESOP scheme.

### Example 3

Example 3 — Preferential allotment for non-cash consideration: PQR Ltd. acquires a building from Mr. X by issuing 50,000 equity shares to him (consideration other than cash). This requires a special resolution under Section 62(1)(c) plus valuation by a registered valuer.

### Example 4

Example 4 — Listed vs unlisted: A listed company doing a rights issue must comply with SEBI (ICDR) Regulations in addition to Section 62. An unlisted public company need only comply with the Companies Act framework.

⚠️ Common exam mistakes

Assuming a Rights Issue can be made by ordinary resolution — Section 62(1)(a) requires a Special Resolution + offer notice (and additional SEBI rules for listed companies).
Believing the company can issue further shares to any third party at any time — it must first offer to existing equity holders unless 62(1)(b) or (c) is followed.
Forgetting that listed companies must additionally comply with SEBI regulations, not just the Companies Act.
Mixing up the three modes — Rights / ESOP / Preferential — each has its own conditions.
Thinking preferential allotment can be for cash only — it can be for cash or non-cash consideration (with valuation requirements).

Bare-Act text Section 62 · The Companies Act, 2013 · click to expand

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; (b) to employees under a scheme of employees' stock option, subject to special resolution and conditions 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 (b), either for cash or for a consideration other than cash.

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Further Issue of Share Capital (Rights Issue & Modes of Further Issue)

Worked example

⚠️ Common exam mistakes