Rights Issue of Shares - Driving Expansion with Shareholder Confidence

When a business needs capital, the first question is: Should we bring in new investors or turn to our own?

A Rights Issue offers a balanced answer — it allows existing shareholders to reinvest in the company they already trust, raising funds without diluting control or inviting external interference.

Understanding the Concept

A Rights Issue, governed by Section 62(1)(a) of the Companies Act, 2013, gives existing shareholders the right to subscribe to additional shares in proportion to their current holdings.

The company issues an offer letter to all shareholders on record, specifying the entitlement ratio (for example, 1 new share for every 3 held), issue price, and subscription period.

Shareholders may:

• Subscribe fully – to maintain ownership;
• Renounce – transfer their rights partly or wholly; or
• Ignore – which results in limited dilution.

For unlisted companies, a rights issue of shares is a relatively simple process — it requires only Board approval under Section 62(1)(a) of the Companies Act, 2013, with no separate shareholders’ resolution needed, followed by the prescribed statutory filings with the Registrar of Companies (ROC).

Why Businesses Prefer Rights Issues

• No control dilution: Promoters retain ownership.
• Speed: Minimal regulatory intervention.
• Flexible pricing: Can be offered below market value.
• Lenient valuation norms: Both the Companies Act, 2013 and FEMA allow flexibility, with no mandatory valuation report required when shares are offered proportionately to existing shareholders.

It’s growth through continuity — not compromise.

Key Compliance Steps

• Board approval for issue price, record date, and ratio.
• Dispatch of offer letters to all eligible shareholders.
• Offer period: Open 15–30 days (shorter only with shareholder consent).
• Payment mode: Payment must be made in cash.
• Allotment & filing: File Form PAS-3 within 15 days of allotment.
• Unsubscribed shares: May be disposed of fairly, ensuring no disadvantage to shareholders.

Valuation and Cross-Border Compliance

While domestic rights issues generally don’t require a formal valuation, the principle remains consistent even when non-residents participate.

• When rights are offered to non-residents: For a rights issue, valuation is not required under FEMA.
• When rights are renounced in favour of non-residents: As per the new Rule 7A of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, a valuation is required in this case.

Under the Income-tax Act, although the angel tax provisions under Section 56(2)(viib) have been withdrawn, the transaction value should still be commercially justifiable to avoid potential scrutiny. Timely filing of Form FC-GPR with the RBI and ensuring consistency between ROC and RBI filings remain critical when foreign shareholders participate.

Accounting Snapshot

These disclosures enhance transparency and investor confidence.

Tax Aspects – A Practical Lens

A rights issue may seem simple, but its tax impact varies by stakeholder. Here’s a compact view

The Entrepreneur’s View

A rights issue shows that the best investors are often the existing ones. It strengthens the balance sheet, rewards loyalty, and raises capital without surrendering independence. For promoters, it’s capital on their terms — fast, compliant, and credible.

Disclaimer

The information contained in this document is for information purposes only. In no way, this document should be treated as an advice. Please reach out to us or your consultants for undertaking detailed analysis.

This author will not be liable for any loss or damage caused by the reader’s reliance on information obtained through this report. The contents are provided for your reference only.

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