Chapter IV - Share Capital and Debentures

Section 62

Section 62: rights issue, ESOP and further issue of shares

When a company with share capital increases its subscribed capital by issuing further shares, section 62 decides to whom the shares must be offered and on what conditions.

Official text

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Statutory text

Bare law

(1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered— (a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:— (i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days or such lesser number of days as may be prescribed and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined; (ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right; (iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company; (b) to employees under a scheme of employees’ stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed; or (c) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed.

(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least three days before the opening of the issue.

(3) Nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company: Provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.

(4) Notwithstanding anything contained in sub-section (3), where any debentures have been issued, or loan has been obtained from any Government by a company, and if that Government considers it necessary in the public interest so to do, it may, by order, direct that such debentures or loans or any part thereof shall be converted into shares in the company on such terms and conditions as appear to the Government to be reasonable in the circumstances of the case even if terms of the issue of such debentures or the raising of such loans do not include a term for providing for an option for such conversion: Provided that where the terms and conditions of such conversion are not acceptable to the company, it may, within sixty days from the date of communication of such order, appeal to the Tribunal which shall after hearing the company and the Government pass such order as it deems fit.

(5) In determining the terms and conditions of conversion under sub-section (4), the Government shall have due regard to the financial position of the company, the terms of issue of debentures or loans, as the case may be, the rate of interest payable on such debentures or loans and such other matters as it may consider necessary.

(6) Where the Government has, by an order made under sub-section (4), directed that any debenture or loan or any part thereof shall be converted into shares in a company and where no appeal has been preferred to the Tribunal under sub-section (4) or where such appeal has been dismissed, the memorandum of such company shall, where such order has the effect of increasing the authorised share capital of the company, stand altered and the authorised share capital of such company shall stand increased by an amount equal to the amount of the value of shares which such debentures or loans or part thereof has been converted into.

Introduction

The default route is a rights offer to existing equity shareholders in proportion to their paid-up capital. Section 62(1) also permits an issue to employees under an employee stock option scheme and an issue to any persons, each authorised by special resolution and subject to prescribed conditions.

Sub-sections (3) to (6) deal with conversion of debentures or loans into shares, including conversion directed by a Government that has lent to the company.

Key takeaways

Rights offer window

The offer notice must allow not less than fifteen days, or such lesser number of days as may be prescribed, and not more than thirty days.

Renunciation by default

Unless the articles provide otherwise, the offer includes a right to renounce in favour of any other person, and the notice must say so.

Valuation for issues to any persons

An issue under clause (c) needs a special resolution and a price determined by a registered valuer’s report, subject to Chapter III and prescribed conditions.

Rights offer to existing equity holders

Under section 62(1)(a), offer the shares to equity shareholders on the offer date in proportion, as nearly as circumstances admit, to the paid-up share capital on their shares, by a letter of offer. The notice must state the number of shares offered and a time not less than fifteen days, or such lesser number of days as may be prescribed, and not exceeding thirty days, after which an unaccepted offer is deemed declined.

After the period expires, or on earlier intimation that a holder declines, the Board may dispose of the shares in a manner that is not disadvantageous to the shareholders and the company.

Dispatch the notice correctly

Section 62(2) requires the notice to be dispatched to all existing shareholders at least three days before the issue opens, by registered post, speed post, electronic mode, courier or any other mode having proof of delivery. Keep delivery evidence for every holder.

Employee stock options and issues to any persons

Clause (b) allows an issue to employees under a scheme of employees’ stock option, subject to a special resolution and prescribed conditions; rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 deals with such schemes for companies outside the SEBI framework.

Clause (c) allows an issue to any persons, including or excluding existing holders and employees, for cash or other consideration, if authorised by special resolution and the price is determined by the valuation report of a registered valuer, subject to the applicable provisions of Chapter III and other prescribed conditions. Rule 13 of the same Rules deals with preferential issues. Check the rules as currently amended before fixing terms.

Private company modifications

G.S.R. 464(E) dated 5 June 2015, issued under section 462, modifies section 62 for private companies: if ninety per cent. of members consent in writing or electronic mode, periods shorter than those in section 62(1)(a)(i) and 62(2) apply, and clause (b) applies with "ordinary resolution" in place of "special resolution". Paragraph 2A, inserted by G.S.R. 583(E) dated 13 June 2017, makes these exceptions available only to a private company that has not defaulted in filing its financial statements under section 137 or annual return under section 92. Check for any later amendment before relying on the exemption.

Conversion of debentures and loans

Section 62 does not apply to shares issued on exercise of a conversion option attached to debentures or a loan, if the terms containing the option were approved by special resolution before the debentures were issued or the loan was raised (sub-section (3)).

Where debentures were issued to, or a loan obtained from, a Government, it may in the public interest order conversion into shares on reasonable terms even without a conversion term. The company may appeal to the Tribunal within sixty days of communication of the order if the terms are not acceptable. If no appeal is filed or the appeal is dismissed, and the order increases authorised capital, the memorandum stands altered accordingly (sub-sections (4) to (6)).

Amendments and commencement

Section 62 came into force on 1 April 2014 under S.O. 902(E), except sub-sections (4) to (6), which came into force on 1 June 2016 under S.O. 1934(E).

Section 14 of the Companies (Amendment) Act, 2017 substituted the registered-valuer words in clause (c) and the whole of sub-section (2), effective 9 February 2018 (S.O. 630(E)). Section 11 of the Companies (Amendment) Act, 2020 inserted "or such lesser number of days as may be prescribed" in sub-clause (i) of clause (a), effective 22 January 2021 (S.O. 325(E)). Whether a lesser period has been prescribed must be checked in the current rules.

Practical preparation

Confirm authorised capital headroom; choose the route under clause (a), (b) or (c); check the articles on renunciation; fix an offer period within the statutory window; dispatch notices at least three days before opening with proof of delivery; for clauses (b) and (c), pass the special resolution and follow rules 12 or 13; obtain a registered valuer’s report for clause (c); file the allotment and resolution returns required by the Act and rules.

Practical checklist

Do

State the renunciation right in the offer notice unless the articles exclude it.
Keep proof of delivery of the offer notice for every shareholder.
Obtain the registered valuer’s report before pricing an issue under clause (c).

Avoid

Do not open the issue less than three days after dispatching notices.
Do not let the Board allot declined shares in a way that disadvantages shareholders or the company.
Do not assume the private-company exemption applies if annual filings are in default.

Illustrative example

Hypothetical: rights issue in an unlisted company

An unlisted public company wants to raise funds from its existing equity shareholders.

Offer
Board approves a letter of offer proportionate to paid-up holdings, open for between fifteen and thirty days.
Notify
Notices go out by speed post and email with proof of delivery at least three days before the issue opens, stating the renunciation right.
Allot
Unsubscribed shares are disposed of by the Board in a manner not disadvantageous to shareholders and the company.

Outcome

The issue follows section 62(1)(a) and (2); allotment filings follow the Act and rules.

Glossary

Rights offer: An offer of further shares to existing equity shareholders in proportion to their paid-up capital.
Renunciation: A shareholder’s right to give up offered shares in favour of another person.
Registered valuer: A valuer registered under Chapter XVII of the Act, whose report fixes the price for a clause (c) issue.

Frequently asked questions

How long must a rights offer stay open?

Not less than fifteen days, or such lesser number of days as may be prescribed, and not more than thirty days from the date of the offer. Private companies may use shorter periods with ninety per cent. member consent under G.S.R. 464(E), subject to its conditions.

Can a shareholder renounce rights shares?

Yes, unless the articles provide otherwise. The offer notice must contain a statement of this right.

Does section 62 apply to conversion of convertible debentures?

Not where the conversion option was approved by special resolution before the debentures were issued or the loan was raised (section 62(3)).

Need help applying this provision to your situation?

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Last updated 11 October 2026

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