When a company wants to raise more money by issuing new shares, it can't just hand them to whoever it likes. Section 62 lays down the pecking order — existing shareholders get first right, then employees, and only then outsiders. Think of it as a fair queue.
The three routes to further issue:
Route 1 — Rights Issue (the most tested one): If Rajesh & Co. Pvt. Ltd. wants to issue 10,000 new equity shares, it must first offer them to existing equity shareholders in proportion to their current paid-up shareholding. This offer comes via a letter of offer (a formal notice). The shareholder gets 15 to 30 days to decide (the exact window can be reduced below 15 days only if SEBI/Rules prescribe a lesser period). If they don't respond, it's treated as a decline. One important right: unless the Articles say otherwise, a shareholder can renounce (transfer their right to subscribe) to any other person. The notice must explicitly mention this. After the window closes, the Board can offer the declined shares to anyone — but in a way that is not disadvantageous to shareholders or the company. The notice must be dispatched at least 3 days before the issue opens, via registered post, speed post, courier, or electronic mode.
Route 2 — ESOP (Employees' Stock Option Plan): Shares can be issued to employees under an ESOP scheme — but only with a special resolution and prescribed conditions. No rights issue process needed here.
Route 3 — Preferential Allotment (to any person): With a special resolution, shares can be issued to any outsider (or even insiders) — for cash or non-cash consideration. The price must be backed by a registered valuer's report. This is your preferential allotment route.
The debenture/loan conversion angle (Sub-sections 3–6): Section 62 doesn't apply when debentures or loans convert into shares if the conversion option was built-in from the start (approved by special resolution). But here's the twist — if the Government gave the loan and decides a conversion is in public interest, it can force the conversion even without that prior option. The company can appeal to the NCLT within 60 days if it finds the terms unreasonable. This is asked frequently as a 4-mark or 6-mark question.
Example 1 — Rights Issue Timeline & Renunciation
Stellar Fabrics Ltd. has 1,00,000 equity shares of ₹10 each fully paid up. It decides to do a rights issue of 20,000 new shares at ₹50 each (₹10 face + ₹40 premium).
Step 1 — Who gets the offer?
Existing equity shareholders, in proportion to their holdings.
Mr. Sharma holds 10,000 shares = 10% of 1,00,000.
His rights entitlement = 10% × 20,000 = 2,000 shares.
Step 2 — Amount payable by Mr. Sharma if he fully subscribes:
2,000 shares × ₹50 = ₹1,00,000
Step 3 — Mr. Sharma renounces 500 shares to his friend Ms. Iyer.
Ms. Iyer pays: 500 × ₹50 = ₹25,000 directly to the company.
Mr. Sharma subscribes to remaining: 1,500 × ₹50 = ₹75,000.
Step 4 — Time window check:
Offer date: 1 April 2026. Last date to accept: must be ≥15 days and ≤30 days from offer → any date between 16 April and 1 May 2026 is valid.
Final Answer: The rights issue is valid. Total raised from Mr. Sharma's entitlement = ₹75,000 + ₹25,000 = ₹1,00,000.
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Example 2 — Preferential Allotment (Route 3)
Nova Infra Pvt. Ltd. wants to issue 5,000 shares to a private equity firm, Falcon Capital, at ₹200 per share (face value ₹10).
Conditions to check:
- Special resolution passed? ✅ (assume yes)
- Price backed by registered valuer's report? ✅ Valuer certifies ₹200 is fair value.
- Chapter III (prospectus/private placement) compliance? ✅
Amount raised:
5,000 × ₹200 = ₹10,00,000
Of this: Face value component = 5,000 × ₹10 = ₹50,000 → goes to Share Capital.
Securities Premium = 5,000 × ₹190 = ₹9,50,000 → goes to Securities Premium Reserve.
Final Answer: Nova Infra can validly allot to Falcon Capital. Share Capital increases by ₹50,000 and Securities Premium by ₹9,50,000.
📖 Bare Act text — Section 62, 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 or such lesser number of days as may be prescribed 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; and the notice referred to in clause (i) shall contain a statement of this right; (iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the share holders and the company; (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 the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed. (2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least three days before the opening of the issue. (3) Nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company: Provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting. (4) Notwithstanding anything contained in sub-section (3), where any debentures have been issued, or loan has been obtained from any Government by a company, and if that Government considers it necessary in the public interest so to do, it may, by order, direct that such debentures or loans or any part thereof shall be converted into shares in the company on such terms and conditions as appear to the Government to be reasonable in the circumstances of the case even if terms of the issue of such debentures or the raising of such loans do not include a term for providing for an option for such conversion: Provided that where the terms and conditions of such conversion are not acceptable to the company, it may, within sixty days from the date of communication of such order, appeal to the Tribunal which shall after hearing the company and the Government pass such order as it deems fit. (5) In determining the terms and conditions of conversion under sub-section (4), the Government shall have due regard to the financial position of the company, the terms of issue of debentures or loans, as the case may be, the rate of interest payable on such debentures or loans and such other matters as it may consider necessary. (6) Where the Government has, by an order made under sub-section (4), directed that any debenture or loan or any part thereof shall be converted into shares in a company and where no appeal has been preferred to the Tribunal under sub-section (4) or where such appeal has been dismissed, the memorandum of such company shall, where such order has the effect of increasing the authorised share capital of the company, stand altered and the authorised share capital of such company shall stand increased by an amount equal to the amount of the value of shares which such debentures or loans or part thereof has been converted into.