Rights Issue — Section 62 Companies Act

For a private limited company, a rights issue is governed by Section 62(1)(a) of the Companies Act 2013, which requires the company to offer new shares to existing shareholders in proportion to their paid-up capital before issuing shares to any outsider. The offer must be made by notice specifying the number of shares offered and the time limit for acceptance, which must not be less than 15 days and not more than 30 days from the date of the offer per Rule 12 of the Companies (Share Capital and Debentures) Rules 2014. If a shareholder does not subscribe within the specified period, the board may dispose of those shares to any persons at a price not less than the price offered to existing shareholders, but only after passing a board resolution and complying with the company's articles. A CA is required to certify the valuation price if shares are issued at a premium to ensure compliance with Section 53 of the Companies Act 2013 (prohibition on issue of shares at discount).

Listed companies conduct rights issues under Chapter III of the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (ICDR Regulations). A listed company with a market capitalisation of ₹1,000 crore or more (or complying with other eligibility conditions under Regulation 99 of the ICDR Regulations) can use the Fast Track Rights Issue (FTR) route without filing a draft letter of offer with SEBI, provided the company has been filing stock exchange disclosures for at least three years and has no outstanding audit qualifications. For the standard route, a draft letter of offer must be filed with SEBI and the stock exchanges at least 30 days before opening, and SEBI will review and issue comments within 30 days under Regulation 91. Rights entitlements (REs) are now mandatorily credited to demat accounts under SEBI Circular SEBI/HO/CFD/DIL2/CIR/P/2020/13 dated January 22, 2020, enabling secondary market trading of REs.

For listed companies, the rights issue price must not be less than the face value of shares, and there is no regulatory floor based on market price (unlike public issues or preferential allotments). However, the pricing is governed by Regulation 89 of the SEBI ICDR Regulations 2018, which requires the price and basis of issue to be disclosed in the letter of offer. For unlisted companies, the price must be determined based on a valuation report from a registered valuer under the Companies Act 2013 if shares are issued at a premium, and must comply with Rule 11UA of the Income Tax Rules 1962 to avoid any deemed income implications under Section 56(2)(viia) for closely held companies (note: Section 56(2)(viib) for startups was abolished from April 1, 2025 but 56(2)(viia) for FMV-basis recipient taxation in closely held companies remains). The CA certifies the valuation and ensures arm's length pricing.

When a shareholder subscribes to rights shares at a price below the fair market value, the difference is potentially taxable under Section 56(2)(x) of the Income Tax Act 1961 as 'Income from Other Sources' if the aggregate fair market value of all property received exceeds ₹50,000. However, Proviso (vii) to Section 56(2)(x) specifically exempts shares received under rights issue from this provision, provided the rights issue is carried out in accordance with SEBI or Companies Act 2013 requirements. The cost of acquisition of rights shares for capital gains purposes is the actual price paid for subscription, per Section 55(2)(aa)(iiia) of the Income Tax Act 1961. If the shareholder renounces the rights entitlement, the renunciation proceeds are taxable as capital gains—short-term if the RE is held for less than 12 months.

Non-resident shareholders (NRIs and foreign nationals) can participate in a rights issue of Indian companies provided the sectoral foreign investment caps under Schedule I of the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 are not breached by the post-issue foreign holding. The subscription by a non-resident must be reported to the Reserve Bank of India through the company's authorised dealer bank by filing Form FC-GPR (Foreign Currency-Gross Provisional Return) within 30 days of allotment, under the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations 2019. Rights entitlements renounced by a resident in favour of a non-resident require prior RBI approval as they constitute a transfer of a capital instrument, per Regulation 4 of the FEMA NDI Rules 2019. The company's CA must certify the post-issue foreign shareholding does not violate the applicable sectoral cap.