Strategic Fundraising: Part 2 Rights Issue In India — Procedure And Common Mistakes

Fundraising remains a critical component for companies seeking to expand operations, strengthen their financial structure, or meet strategic objectives. While Part 1 of this series examined private placements as a preferred route for startups and growth-stage companies, many businesses—particularly private limited companies—choose to raise capital from within their existing shareholder base. In this context, rights issues under the Companies Act, 2013 (“Companies Act”) provide a statutory, shareholder-centric method of infusing additional funds without diluting ownership. This write-up outlines the governing legal framework, procedural requirements, practical considerations, and common pitfalls associated with rights issues

RIGHTS ISSUE

A rights issue refers to an offer made by a company to its existing equity shareholders,[1] allowing them the right to subscribe to further shares in proportion to their current shareholding. It safeguards shareholders’ pre-emptive right to maintain their ownership percentage and avoid dilution. Shareholders may accept, renounce, or decline the offer at their discretion.
For startups and growing companies, private placements are the most common route for accessing capital. This method is ideal, and the most commonly followed when companies are looking for external funding.

Companies typically go for rights issues when they seek to raise additional capital while preserving the holding of existing shareholders. This method is cost-effective and less tedious as compared to private placements and public issue.[2]

LEGAL FRAMEWORK

The Companies Act provides specific legal and procedural steps for issuance of shares through rights issue. The significant requirements are discussed below:

1. Eligibility to Participate in Rights Issue: Only the existing equity shareholders of a company can subscribe to the shares being issued through a rights issue. Employees having ESOPs may also subscribe subject to an approval by special resolution to that effect. Preference shareholders cannot subscribe to a rights issue regardless of whether those shares carry conversion rights unless a contractual arrangement has been entered into between the Company and other shareholders.
2. Permissibility under the Articles of Association (AoA) & Increase in Authorised Capital: The AoA must authorise the company to conduct rights issues. The company may, at its discretion, increase the authorised share capital by an ordinary resolution in a general meeting, and file Form SH-7 (Notice to the Registrar of any Alteration in Share Capital) to be filed with the RoC within 30 days in case the share capital of the company will increase pursuant to such rights issue.[3]
3. Board Resolution: The Board must approve the key terms of the rights issue; including the rights ratio, price, record date, offer window, renunciation terms, and prepare a draft Letter of Offer for the rights issue. The Board has discretion to fix price, provided it is fair, justified, and disclosed in the offer letter. However, in the event of a non-resident investment, the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 will apply and it prescribes pricing guidelines for issue of equity instruments including by way of rights issue to persons resident outside India.[4]
4. Letter of Offer: The Letter of Offer must be dispatched to all existing equity shareholders of the company at least 3 (three) days before the issue opens, through registered post/speed post/electronic communication/any other communication form having proof of delivery to existing shareholders.[5]
5. Offer Window and Applications The Letter of Offer must clearly specify the number of shares offered and the offer window, which under Section 62(1)(a) must remain open for a minimum of 7 (seven) days and a maximum of 30 (thirty) days from the date the rights issue opens (not from the date of dispatch).[6] A mandatory 3 (three) day gap must be maintained between the dispatch of the offer letter and the opening of the issue. [7] During the offer period, the company must receive applications for acceptance, rejection, or renunciation, and address any fractional entitlements as per the AoA and company policy. In the case of private companies, a statutory relaxation permits the offer to be closed before 7 (seven) days if shareholders holding at least 90% (ninety percent) of the share capital consent in writing or electronically. [8]
6. Renunciation of Rights Issue: The Companies Act grants shareholders the right to renounce their entitlement under a rights issue, either in full or in part.[9] Such renunciation may be exercised in favour of existing shareholders or even non-shareholders, provided the same is not restricted by the AoA. The company must clearly state this right, along with timelines for its exercise, in the offer letter issued to the shareholders.
7. Board Approval for Allotment: The Board must pass a resolution approving the shares allotted via rights issue. Any unsubscribed shares must be disposed of in a manner that is not disadvantageous to any shareholder/the company.[10] Form PAS-3 (Return of Allotment) must be filed with the RoC within 30 (thirty) days of making the allotment. [11]
8. Share Issue: The company must issue the shares allotted through the rights issue to the existing shareholders. In case of physical securities, share certificates must be delivered within 2 months from the date of allotment.[12] In the case of dematerialised securities, the company must coordinate with the depository participant to ensure timely credit of the shares to the respective demat accounts, which is treated as issuance for purposes of Section 56.[13]
9. Annual Return: The annual filing of Form MGT-7 (Annual Return) must include the number of shares issued, allotment details, and updated shareholding pattern after the rights issue.
10. Treatment of money received: When shares are issued, the price is split, the nominal value is credited to the Share Capital Account, and any excess (the premium) is transferred to the Securities Premium Account. This is mandated by Section 52 of the Companies Act, making it a restricted reserve and not a free reserve. This restriction ensures the capital raised through the rights issue is protected and used to strengthen the company’s financial structure.

RECENT ROC ENFORCEMENT: REAL CASES, REAL CONSEQUENCES

RoCs across India are increasingly scrutinising rights issue compliances and imposing penalties for procedural lapses. Delays in filing Form PAS-3, required within 30 days of allotment, attract a penalty of ₹1,000 per day (up to ₹1,00,000) under Section 39(5). Other deviations under Section 62, such as inadequate notice or premature allotment, are often penalised under the residuary provision of Section 450. What was once considered routine non-compliance now carries significant financial and reputational consequences for companies and their directors. Below are a few recent RoC/NCLT orders illustrating these enforcement trends:

1. Macquarie Group Management (India) Private Limited: The company dispatched its rights issue notice on 30 June 2021 and opened the issue on 1 July 2021, without maintaining the mandatory three-day gap between dispatch and opening. A penalty of ₹10,000 was imposed on the company and ₹10,000 on each director in default.[14]
2. Jainam Broking Limited: The company made its first allotment on 15 July 2023, even though the offer was open until 25 July 2023. The RoC held that this amounted to premature closure of the rights issue and imposed a penalty of Rs. 2,00,000 on Jainam Broking Limited and Rs. 50,000 on each of the directors and the company secretary.[15]
3. Saiyoga Nidhi Limited: The company failed to file Form PAS-3 within the statutory timeline of 30 days. Acting under Section 39(4) read with Section 454, the RoC imposed penalties wherein under the Company and its directors were fined Rs. 3,00,000 for failure to file the return of allotment (PAS-3) within the prescribed period.[16]
4. Aurelia Laterite Mining Private Limited: In this case, the NCLT Hyderabad set aside an entire allotment made through a rights issue after finding that the company failed to prove proper dispatch and delivery of the notice to an existing shareholder as required under Section 62(2). The company opened and completed the allotment without ensuring the mandatory three-day notice gap and without adequate proof of service. As a result, the NCLT held the allotment of 10,200 shares to be in complete violation of Section 62 and declared the allotment invalid.[17] These enforcement actions highlight that rights issues, though simpler than public offerings, require strict adherence to statutory procedure and timelines. Companies that follow the prescribed framework not only avoid regulatory penalties but also reinforce shareholder confidence and maintain strong corporate governance.Rights issues offer companies a reliable and shareholder-friendly route for raising additional capital while ensuring compliance with the statutory framework. The procedures outlined above function as essential safeguards that uphold transparency and protect shareholder rights. Companies that diligently follow these requirements not only avoid regulatory pitfalls but also reinforce investor trust and strengthen their corporate governance practices.

 
QUICK COMPARISON BETWEEN PRIVATE PLACEMENTS AND RIGHTS ISSUES

For any queries or discussions, you can reach out to our contributors:

Akash Kumar (akash@asqlegal.com)

Asutosh Mahapatra (asutosh@asqlegal.com)

We want to acknowledge the efforts of Mr. Roshan Kumar Behera (III Year, B.A. LL.B. (Hons.), National Law University Odisha) in assisting us with this blog piece.

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References:

1. Section 62(1)(a), the Companies Act 2013.
2. Companies planning for initial public offering must adhere to SEBI regulations including SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations). These regulations, govern pricing, offer size, abridged prospectus requirements, and monitoring agency appointments and are the primary regulatory framework for Indian companies planning to list themselves.
3. Rule 15, Companies (Share Capital & Debentures) Rules, 2014.
4. Rule 21, Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
5. Section 62(2), The Companies Act 2013.
6. Rule 12A, The Companies (Share Capital and Debentures) Rules, 2014.
7. Section 62(2), Companies Act, 2013.
8. MCA Notification G.S.R. 464(E), dated 5 June 2015 (Private Company Exemptions).
9. Section 62(1)(a)(ii), Companies Act 2013.
10. Section 62(1)(a)(iii), Companies Act 2013.
11. Rule 12, The Companies (Prospectus and Allotment of Securities) Rules, 2014.
12. Section 56(4)(b) of the Companies Act, 2013. It is suggested to issue the securities in dematerialised form as the MCA has been shifting to mandatory dematerialised share issuance regime.
13. Section 56(4)(b), Companies Act, 2013.
14. Order of Registrar of Companies and Adjudicating Authority, NCT of Delhi & Haryana, dated December 11, 2024, No.ROC/D/Adj/Order/Section62(2)/MACQUARIE/4651-4654, available at: https://www.mca.gov.in/bin/dms/getdocument?mds=wYQtyJTbT5takoRbwQsyAg%253D%253D&type=open
15. Order of Registrar of Companies, Ahmedabad, dated September 23, 2025, PO/ADJ/09-2025/AD/00682, available at: https://www.mca.gov.in/bin/dms/getdocument?mds=Btslor65u%2FUTtgkipYFX1Q%3D%3D&type=open
16. Order of Registrar of Companies and Adjudicating Authority, Tamil Nadu, dated February 20, 2023 ROC/CBE/Adj/39(4)/032780/2023, available at: https://www.mca.gov.in/bin/dms/getdocument?mds=S83fKrKwgXajoNRc0PAOsQ%253D%253D&type=open
17. Soban Babu Sagina vs. Aurella Laterite Pvt Ltd & 3 others, NCLT, Hyderabad Bench – I in CP No.179/241/HDB/2019, order dated April 28, 2023, available at: https://nclt.gov.in/gen_pdf.php?filepath=%2FEfile_Document%2Fncltdoc%2Fcasedoc%2F3607130003022019%2F04%2FOrder-Challenge%2F04_order-Challange_004_168354571214304409736458de70d2804.pdf&_