“We are issuing shares” is not a complete legal plan. An offer to existing owners and an offer to a new investor can follow different Companies Act paths even if both result in the same class of shares.
The route affects who may receive the offer, what approvals and valuation are needed, how money is handled and which filings prove the issue was valid.
Quick Answer
A rights issue offers securities to existing shareholders under section 62. Private placement under section 42 is an offer to identified persons with strict solicitation and banking rules. Preferential allotment under section 62 and related rules addresses issue to selected persons and may interact with private placement. Choose from the actual investor group, instrument and articles; check FEMA separately for non-residents.
1. Who is receiving the offer?
A rights route begins with existing shareholders and the statutory offer mechanics. It can preserve proportional ownership if everyone participates. If one holder declines or renounces where permitted, the eventual ownership may still shift. Check the company’s articles and the offer terms.
A new investor generally needs another route. Private placement requires identified persons; preferential issue rules can add valuation and disclosure requirements. Calling an outsider offer a “rights issue” does not remove those conditions.
- List current and proposed holders.
- Check class rights and articles.
- Model participation and dilution.
2. Compare procedure and evidence
Section 42 requires a controlled offer, offer record and banking process. Rights issues have their own notice and acceptance mechanics. Preferential issues may need special resolutions, explanatory disclosures and valuation under current rules.
Prepare a route memo with the exact section, rule, approval, offer document, money receipt and filing. A board resolution alone is not enough if shareholder approval or a prescribed document is needed.
- Map approvals before offers go out.
- Use current MCA forms.
- Retain delivery and acceptance evidence.
3. Price, time and investor rights
Valuation needs can differ by route, class and investor residence. Do not infer that a rights issue has no tax or pricing consequences in every case. A new investor will also negotiate governance rights that should align with articles and existing shareholder agreements.
Time pressure should not drive a false route. A faster informal collection of money can create a slower correction later. Calendar the true allotment and return deadlines from the governing process.
- Check valuation and tax effects.
- Align SHA and articles.
- Calendar receipt and allotment.
4. Foreign holders and reporting
A non-resident’s subscription adds FEMA sector, entry-route, pricing and reporting questions. Existing foreign shareholders do not make every later issue automatic. Examine the instrument and post-issue foreign ownership on a fully diluted basis.
Keep bank remittance evidence, investor KYC, valuation and filings with the corporate closing file. If the company has downstream investment or regulated activities, assess those conditions too.
- Check FDI route and caps.
- Reconcile resident and non-resident participation.
- Plan FC-GPR or other reports.
How to record the decision
A short decision note should explain why the chosen route fits the facts, which authority controls the point, what was checked and which assumptions remain open. For rights issue vs private placement, the note should also identify the responsible person, the next filing or approval event and the evidence that supports each conclusion.
Keep the note with board materials, agreements, portal acknowledgements and professional advice. This simple record helps founders answer investor, lender and regulator questions without reconstructing the reasoning months later. Update it whenever the business model, ownership, money flow, instrument terms or scheme status changes.
Documents to keep in one working file
The exact set depends on the transaction, but the working file should make the facts easy to test. Start with these records and add authority-specific forms or declarations where required:
- List investors and securities.
- Read articles and existing agreements.
- Choose the correct issue route.
- Prepare approvals and valuation.
- Control offer and money receipt.
Use dated versions and keep a clear approval trail. A missing email, valuation input or portal receipt can become a material due-diligence issue even when the commercial decision itself was sound.
Decision table
Use the facts of the proposed transaction to test each row before choosing a route.
| Route | Typical recipients | Key process issue |
|---|---|---|
| Rights issue | Existing shareholders | Offer, acceptance and proportionate rights |
| Private placement | Identified persons | Section 42 offer, banking and records |
| Preferential issue | Selected persons | Section 62 rules, approval and valuation |
| Foreign participation | Non-resident holder | FEMA route, pricing and reporting |
Practical checklist
Work through these steps using dated documents, not assumptions made in a pitch deck.
- List investors and securities.
- Read articles and existing agreements.
- Choose the correct issue route.
- Prepare approvals and valuation.
- Control offer and money receipt.
- Allot, file and update cap table.
Mistakes that create avoidable delay
The following shortcuts frequently create avoidable legal or filing work later.
- Using “rights issue” for an outsider offer.
- Treating preferential and private-placement requirements as mutually exclusive.
- Ignoring FEMA because a shareholder is already foreign.
When professional review is useful
A fact-specific review should test the chosen route, evidence and filing sequence before money or customer commitments make a correction expensive.
For a fact-specific review, share the proposed activity, ownership, funding instrument and present stage with Sunny G And Co. at contact@cssunnygupta.com. The scope and professional fee should be agreed only after the facts and required filings are clear.
Related service paths
If the issue involves actual filings or structuring, these service pages describe the relevant scope of work. They do not change the eligibility and approval tests explained above; the right route still depends on the company’s documents and intended activity.
Official sources and last review
This article was last reviewed on 15 September 2026. Rules, portal status and filing practices can change, so check the current authority before acting.
