A rights issue is a way for a company to raise fresh capital by offering new shares to its existing shareholders in proportion to their current holdings. It is governed by Section 62(1)(a) of the Companies Act, 2013, which enshrines the pre-emptive right of existing members to be offered new shares before anyone else. Because the offer goes to people who already own the company, it protects them from dilution and is far cheaper and quicker than a public issue.
How a rights issue works
The company offers new shares to existing equity shareholders in the same proportion as their paid-up holding. For example, a 1:2 rights issue lets a member buy one new share for every two already held. The price is usually set at a discount to fair value to encourage take-up, though for an unlisted company it must still be supported by a registered valuer's report where one is required. A shareholder may accept fully, accept in part, renounce (sell or gift) the entitlement to another person, or let it lapse. Importantly, a rights issue needs only a Board resolution and not a special resolution, since the right is already built into Section 62.
Key rules to follow
- The offer must be made by notice stating the number of shares and the ratio, and must stay open for not less than 15 days and not more than 30 days from the date of the offer. A private company may shorten this to not less than 7 days under Rule 12A, or reduce it further if members holding 90% of shares give written or electronic consent.
- The letter of offer must be dispatched at least 3 days before the issue opens (Section 62(2)) by registered post, speed post or electronic mode.
- The notice must expressly mention the right of renunciation, unless the articles provide otherwise.
- A return of allotment in Form PAS-3 must be filed with the ROC within 30 days of allotment.
- Share certificates must be issued within 2 months of allotment (Section 56(4)) and stamped as per the applicable state stamp duty.
A common misconception is that the letter of offer for an unlisted rights issue is filed with the ROC on Form PAS-2. It is not. PAS-2 (information memorandum) and PAS-4 (private placement offer letter) belong to other routes; a rights issue has no prescribed offer-letter format, and nothing is filed with the ROC until PAS-3 after allotment. Listed companies follow a separate track under the SEBI (ICDR) Regulations, 2018, with the letter of offer filed with the stock exchanges and SEBI.
Typical timeline
| Stage | Action | Indicative timing |
|---|---|---|
| 1 | Board meeting approves the issue, ratio, price and record date | Day 0 |
| 2 | Dispatch letter of offer to shareholders | At least 3 days before opening |
| 3 | Offer open for acceptance | 15-30 days (min 7 for a private company) |
| 4 | Receive applications and application money | During the offer window |
| 5 | Board allots shares once the offer closes | After the window ends |
| 6 | File PAS-3 with the ROC | Within 30 days of allotment |
| 7 | Issue share certificates | Within 2 months of allotment |
Common mistakes to avoid
- Offering shares to only some shareholders or in the wrong proportion, which breaches the pre-emptive right and can be challenged.
- Missing the 3-day dispatch gap or keeping the window open for fewer than the permitted minimum days.
- Failing to state renunciation rights in the notice.
- Delaying PAS-3 beyond 30 days, which attracts per-day additional filing fees.
- Allotting unsubscribed shares to outsiders on terms more favourable than those offered to members; the Board's discretion here is not absolute and must not disadvantage existing shareholders.