Right Issue under the Companies Act, 2013 for Private Limited Company

If you are an entrepreneur or a finance professional looking to raise capital without giving up control, understanding the Right Issue under the Companies Act, 2013can completely change the way you plan your funding strategy. A rights issue allows a company to offer additional shares only to its existing shareholders, giving them the first and fair opportunity to maintain their ownership stake. It is an efficient method to raise funds because it is quick to execute, cost effective, and lighter on compliance when compared to private placement or preferential allotment.

Even though the concept sounds simple, the legal and procedural requirements under the Companies Act, 2013 must be followed carefully. Missing a timeline, using the wrong format, or ignoring renunciation rules can lead to complications.

In this blog, we will explain the Right Issue under Companies Act, 2013 for Private Limited companies along with eligibility, the complete process, pricing, documentation, renunciation, ROC filings, compliance timelines, and practical insights for smooth execution.

Table of Contents

Regulatory Framework Governing Rights Issue under Companies Act, 2013

A Rights Issue under the Companies Act, 2013 for a private limited company must comply with specific provisions under the Companies Act, 2013 to ensure transparency and fairness for all existing shareholders.

Reference under Companies Act, 2013	Regulatory Aspect	Requirement
Section 62(1)(a)	Legal basis for rights issue	Rights issue can be offered only to existing shareholders in proportion to their shareholding
Section 173 and SS-1	Board approval	Board meeting must be held to approve issue terms such as ratio, price and draft offer letter
Rule 12 of Companies (Share Capital and Debentures) Rules, 2014	Offer letter format	Private companies are not required to use PAS-4. A simple written or electronic offer letter is sufficient
Section 62(2)	Dispatch of offer letter	Offer letter must be sent to all existing shareholders at their registered address or email ID
Proviso to Section 62(1)(a)	Minimum offer period	Offer must remain open for at least 15 days
Proviso to Section 62(1)(a)	Shorter offer period	Offer period can be shortened if 90 percent of shareholders give written or electronic consent
Section 62(1)(a) and AOA	Renunciation rights	Shareholders of a private company cannot renounce their rights unless the Articles permit it.
Section 39	Mode of allotment	Allotment must be completed within the validity period of the rights issue
Section 39(4) and Rule 12	ROC filing	Form PAS-3 must be filed within 30 days of allotment
Section 56	Issue of share certificates	Share certificates must be issued within 2 months from the date of allotment

By following these statutory requirements, a private limited company can complete a rights issue smoothly while staying fully compliant with the provisions governing the Right Issue under the Companies Act, 2013.

Eligibility and Preconditions for a Rights Issue under the Companies Act, 2013

Here are the key conditions a private limited company must satisfy before initiating a Right Issue under the Companies Act, 2013:

The company must already have an existing issued share capital to offer shares through a rights issue as per Section 62(1)(a).
Only existing shareholders are eligible to receive rights shares in proportion to their current shareholding.
The company must not be in default of filing PAS-3 for any previous allotment under Sections 42 and 62.
A valid board meeting must be conducted to approve the rights issue, including ratio, price and timelines under Section 173.
The offer letter must be prepared and ready for dispatch before the issue opens as required under Section 62(2).
The Articles of Association must permit issuing rights shares and renunciation, if applicable.
The company must ensure minimum subscription is received before proceeding with allotment in line with Section 39.
The company must be prepared to issue share certificates within 2 months of allotment as mandated by Section 56.

By fulfilling these preconditions, a company can proceed smoothly with a compliant and well-structured rights issue.

Step-by-Step Process of Rights Issue under the Companies Act, 2013

A private limited company must follow a clear procedural flow to carry out a legally compliant Right Issue under the Companies Act, 2013.

*S.No.*	Step	Process	Requirement
1	Convene Board Meeting	Hold a board meeting to approve the rights issue and finalise issue price, ratio, timeline and draft offer letter.	Issue notice to directors and pass the necessary board resolution.
2	Prepare Offer Letter	Draft the offer letter containing complete details of the rights issue.	Ensure accuracy of shareholder entitlement and terms.
3	Dispatch Offer Letter	Send the offer letter to all existing shareholders.	Delivery may be through registered post, courier or electronic mode.
4	Keep Offer Period Open	Allow shareholders time to accept, decline or renounce (if permitted).	The offer must remain open for at least 15 days unless 90 percent consent to a shorter period.
5	Receive Applications and Money	Collect acceptance forms and application money from shareholders.	Ensure all responses are received within the offer period.
6	Allot Shares	Conduct a second board meeting to approve allotment of shares.	Complete allotment only after receiving valid applications.
7	File PAS-3 with ROC	File the Return of Allotment with the Registrar of Companies.	PAS-3 must be filed within 30 days of allotment.
8	Issue Share Certificates	Provide share certificates or credit shares in demat form.	Certificates must be issued within 2 months of allotment.

Common Mistakes & How to avoid them in a Rights Issue under the Companies Act, 2013

Issuing offer letters without proper Board approval – Always pass a valid Board Resolution before initiating a Rights Issue to avoid compliance gaps.
Incorrect calculation of entitlement ratio – Double-verify shareholding data and use automated cap-table tools to ensure accurate Rights Issue entitlement.
Missing the minimum 15-day offer period – Maintain a timeline tracker to ensure statutory compliance for Rights Issue notice periods.
Not maintaining proof of dispatch of offer letters – Use registered email/physical modes and preserve acknowledgments to validate compliance during Rights Issue audits.
Accepting applications after the closure date – Clearly communicate deadlines and set internal cut-off reminders to avoid invalid acceptances in a Rights Issue.
Improper handling of renunciation rights – Provide clear instructions to shareholders on process and timelines to ensure smooth renunciation in the Rights Issue.
Mismatch in Form PAS-3 disclosures – Cross-check offer details, allotment date, and funds received before filing PAS-3 to avoid MCA rejections post Rights Issue.
Not updating the Register of Members – Update statutory registers immediately after allotment to maintain accurate records for any future Rights Issue or transactions.
Delays in share certificate issuance – Adhere to the 2-month statutory deadline and maintain a tracking log to prevent delays in post-allotment compliances of a Rights Issue.

Conclusion

Raising capital through a Right Issue under the Companies Act, 2013 can be a smart way for companies to strengthen their financial position while giving existing shareholders a fair chance to maintain ownership. While the process may seem complex at first, understanding the eligibility, compliance requirements, timelines, and common pitfalls makes it much easier to execute smoothly.

By carefully following the steps, avoiding common mistakes, and staying organized with board approvals, offer letters, allotments, and filings, companies can ensure a hassle-free and fully compliant Right Issue under the Companies Act, 2013.

At My Legal Business LLP, our team of experts provides end-to-end support for companies looking to conduct a Right Issue under the Companies Act, 2013, including board resolutions, offer letter preparation, ROC filings, and post-allotment compliance, ensuring a smooth and legally compliant fundraising process. Contact us today for better execution and structured legal compliance.

Frequently Asked Questions

What is a Right Issue under the Companies Act, 2013?

A Right Issue under the Companies Act, 2013 is an offer by a company to its existing shareholders to purchase additional shares in proportion to their current holdings, as provided under Section 62(1)(a) of the Act.

What is the minimum notice period for a Right Issue under the Companies Act, 2013?

The Right Issue under the Companies Act, 2013 requires a minimum notice period of three days before opening the subscription, with shareholders typically given 15 to 30 days to exercise their rights.

Can existing shareholders sell their rights in a Right Issue under the Companies Act, 2013?

Yes, under a Right Issue under the Companies Act, 2013, shareholders can renounce or transfer their rights either wholly or partially to other persons, including third parties.

Is board approval sufficient for a Right Issue under the Companies Act, 2013?

For a Right Issue under the Companies Act, 2013 offered proportionately to existing equity shareholders, board approval is generally sufficient, and special shareholder resolution is not required under Section 62(1)(a).

Can private limited companies issue rights at any price in a Right Issue under the Companies Act, 2013?

Yes, under a Right Issue under the Companies Act, 2013, private limited companies have the flexibility to determine the issue price at their discretion, subject to provisions in their Articles of Association.