Rights issue is the offer of new shares by a company to its existing shareholders in proportion to their current holdings, giving them a pre-emptive right to subscribe before shares are offered to outsiders. Under Indian law, this right is codified in Section 62(1)(a) of the Companies Act, 2013, which mandates that further shares must first be offered to existing members.
Legal definition
Section 62(1)(a) of the Companies Act, 2013 provides:
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...
The letter of offer must specify the number of shares offered, the price, the limiting date (not less than fifteen days and not exceeding thirty days from the date of the offer) within which the offer must be accepted, and a statement that unless the offer is accepted within the said period, it shall be deemed to have been declined.
For listed companies, the rights issue framework is further governed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
How courts have interpreted this term
Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1981) 3 SCC 333
The Supreme Court held that the pre-emptive right of existing shareholders under the Companies Act is a substantive right that cannot be defeated by the company through irregular allotment procedures. The Court established that any allotment of shares in violation of the statutory pre-emptive right is liable to be set aside, reinforcing the importance of the rights issue mechanism as a protection against dilution of existing shareholders' interests.
V.B. Rangaraj v. V.B. Gopalakrishnan (1992) 1 SCC 160
The Supreme Court examined the enforceability of share transfer restrictions in private companies and held that the right of first refusal embedded in the articles of association is akin to the statutory pre-emptive right. The Court observed that these rights preserve the closely-held character of the company and protect existing shareholders from unwanted dilution.
Why this matters
The rights issue mechanism serves a dual purpose in Indian corporate law. First, it protects existing shareholders from dilution of their proportionate ownership and voting power by giving them the first opportunity to subscribe to new shares. Second, it provides companies with a structured and legally compliant method to raise additional equity capital from a known investor base.
For practitioners, the procedural requirements of Section 62(1)(a) are critical. The company must send a letter of offer to all existing shareholders at their registered address by registered post or speed post or by electronic mode. The offer must remain open for not less than fifteen days and not more than thirty days. If any shareholder declines or fails to accept within this period, the board may dispose of the unsubscribed shares in such manner as is not disadvantageous to the shareholders and the company.
A key point that is often overlooked is that the pre-emptive right under Section 62(1)(a) can be overridden by a special resolution. Section 62(1)(c) permits a company to issue shares to any person, whether or not they are existing shareholders, if authorised by a special resolution — this is commonly known as a "preferential allotment" or "private placement" route. However, for listed companies, SEBI regulations impose additional pricing and disclosure requirements on such allotments.
Related terms
Broader concepts:
Related procedures:
Related instruments:
Frequently asked questions
Is a shareholder obligated to subscribe to a rights issue?
No. The rights issue is an offer, not a compulsion. Existing shareholders may accept the offer (fully or partially), renounce their rights in favour of another person, or let the offer lapse. If the offer lapses, the board may allot the unsubscribed shares to other persons.
Can a company issue rights shares at a price below market value?
Yes. There is no statutory requirement that rights issue shares must be priced at or above market value. Companies frequently offer rights shares at a discount to the prevailing market price to incentivise subscription. However, the pricing must not be disadvantageous to existing shareholders and must comply with SEBI regulations for listed companies.
What is the minimum acceptance period for a rights issue?
Under Section 62(1)(a) of the Companies Act, 2013, the offer must remain open for a minimum of fifteen days and a maximum of thirty days from the date of the offer. If the shareholder does not respond within this period, the offer is deemed to have been declined.
Can rights be renounced in favour of another person?
Yes. A shareholder who does not wish to subscribe to the rights issue may renounce their rights in favour of any other person, unless the articles of the company provide otherwise. For listed companies, the rights entitlements are listed and traded on the stock exchange, allowing shareholders to sell their rights in the market.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.