Rights issue, private placement, or bonus shares: What the Companies Act actually requires

Rights issue, private placement, or bonus shares: What the Companies Act actually requires

A founder closes a ₹2 crore cheque from a new investor over WhatsApp, asks the company secretary to "issue him shares," and assumes the paperwork is a formality. Three months later the auditor flags that the money was deposited into the company's regular current account, no PAS-4 offer letter was ever served, and PAS-3 was filed 45 days late. The "formality" has now become a Section 42 contravention carrying a penalty that can equal the entire amount raised. The mistake is almost never the deal — it is choosing the wrong route to issue shares, or choosing the right route and ignoring its procedure.

Indian private limited companies have three common ways to issue fresh shares: a rights issue under Section 62(1)(a), a private placement under Section 42, and a bonus issue under Section 63. They are not interchangeable. Each answers a different question, each has its own resolution, its own forms, and its own penalties. Picking the wrong one — or skipping a step in the right one — is one of the most frequent reasons a clean cap table turns into an MCA21 compliance flag.

What the law actually requires

Rights issue — Section 62(1)(a). When a company wants to raise capital from its existing shareholders, the default route is a rights issue. The shares must be offered to existing members in proportion to their current holding. The company sends a letter of offer specifying the number of shares offered and giving members a window — not less than 15 days and not more than 30 days — to accept. Crucially, that window can be compressed for a private company if 90% of members give their consent in writing or electronically, which is what makes the rights route fast for tightly held companies. The offer must also carry a right of renunciation unless the articles say otherwise. A rights issue needs only a board resolution (Section 179) — no shareholder special resolution — because no pre-emptive right is being overridden; everyone is being offered their fair share. The allotment is then reported to the ROC in Form PAS-3 within 30 days.

Private placement — Section 42 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. When the money is coming from outside the existing shareholder base — a new angel, a VC fund, a strategic partner — the company cannot simply hand over shares. It must run a private placement. This requires a special resolution (Section 62(1)(c) for the price/route plus Section 42 for the placement itself), a valuation report from a registered valuer, and a numbered private placement offer letter in Form PAS-4 issued to identified persons. The hard limits: an offer can go to a maximum of 200 persons in a financial year per class of security (qualified institutional buyers and ESOP holders are excluded from this count). Application money must be received only by cheque, demand draft or banking channel — never cash — into a separate dedicated bank account, and cannot be used until allotment is complete and PAS-3 is filed. Securities must be allotted within 60 days of receiving the money; if not, the money must be refunded within 15 days, failing which it carries 12% interest per annum from the end of the 60-day period. Form PAS-3 must be filed within 30 days of allotment, and no fresh offer can be made while an earlier one is still open.

Bonus issue — Section 63. A bonus issue raises no money at all. It capitalises reserves the company already has and converts them into fully paid shares distributed free to existing shareholders. The permitted sources are strictly defined: free reserves, the securities premium account, or the capital redemption reserve account. Reserves created by revaluation of assets cannot be used. The articles must authorise a bonus issue (if they do not, alter them first under Section 14). The company must not be in default on any fixed deposit or debt security, nor on statutory dues such as PF, gratuity or bonus to employees, and all partly paid shares must be made fully paid before the bonus is declared. A bonus issue cannot be made in lieu of dividend, and once announced it cannot be withdrawn. Approval is by the board and then members in general meeting, with allotment reported in PAS-3.

Practical implications — what actually goes wrong

The penalties are not theoretical. Under Section 42(10), if a company accepts money or makes an offer in contravention of the private placement provisions, the company, its promoters and its directors are liable to a penalty that may extend to the amount involved in the offer or ₹2 crore, whichever is higher, and the company must refund all subscription money within 30 days of the penalty order. ROC offices have been actively imposing these penalties in 2025–26 for the most ordinary lapses: money received before PAS-4 was issued, application money parked in the regular current account instead of a dedicated one, allotment beyond 60 days, or PAS-3 filed late.

Under the MCA21 v3 portal, these failures surface faster than they used to. PAS-3 is now a linked filing, and the system timestamps every submission, so a late or out-of-sequence return is visible on the company master data the moment it is filed. Late PAS-3 attracts additional fees under Section 403 that escalate the longer the delay runs, and a pattern of late capital-related filings is exactly the kind of signal that pushes a company up the scrutiny queue.

For a rights issue the failure mode is subtler: founders use a rights issue to dilute a minority shareholder by offering shares everyone "knows" the minority cannot afford to take up, then quietly renouncing the unsubscribed portion to a favoured party. If the offer letter, the 15-to-30-day window, and the renunciation right are not handled exactly as Section 62 requires, the minority shareholder has a clean oppression-and-mismanagement claim under Sections 241–242 before the NCLT.

For a bonus issue the trap is the source of funds. Capitalising a revaluation reserve, or issuing a bonus while statutory dues are outstanding, makes the entire allotment defective — and because a bonus cannot be withdrawn, unwinding it is far harder than fixing a delayed filing.

Step-by-step: choosing and executing the right route

• Diagnose the objective first. Raising money from existing shareholders only → rights issue (Section 62(1)(a)). Raising money from new or selected investors → private placement (Section 42). Rewarding shareholders or improving share liquidity without raising money → bonus issue (Section 63). Do not start drafting resolutions until this is settled.
• Check the articles. Confirm the authorised share capital is sufficient (increase it under Section 61 and file SH-7 if not) and that the articles permit the chosen route — bonus issues in particular need express authority.
• For a private placement, get the valuation done before any money moves. A registered valuer report is mandatory; the price cannot be agreed informally and back-fitted.
• Pass the correct resolution. Board resolution for a rights issue; special resolution (filed in MGT-14 within 30 days) for a private placement and for any issue at a price requiring shareholder approval; board plus general-meeting approval for a bonus issue.
• Serve the right offer document. PAS-4 (serially numbered, to named persons) for private placement; a letter of offer with renunciation rights for a rights issue. A bonus issue needs no offer letter.
• Route the money correctly. For private placement, open a separate bank account, accept funds only through banking channels, and do not touch the money until allotment and PAS-3 are complete.
• Allot within the deadline. 60 days from receipt of money for private placement; refund within 15 days if you miss it to avoid 12% interest.
• File PAS-3 within 30 days of allotment, and update the register of members and beneficial ownership. File MGT-14 where a special resolution was passed.

FAQ

Can a private limited company raise money from a new investor through a rights issue?
No. A rights issue under Section 62(1)(a) can only be offered to existing shareholders in proportion to their holdings. To bring in a new investor you must use Section 62(1)(c) read with Section 42 — a private placement with a special resolution and a valuation report.

How many investors can I approach in a private placement?
A maximum of 200 persons per financial year, per class of security, excluding qualified institutional buyers and employees holding shares under an ESOP scheme. Cross that number and the offer is deemed a public offer, triggering full prospectus liability.

What is the deadline to file PAS-3, and what happens if I miss it?
PAS-3 (return of allotment) must be filed with the ROC within 30 days of allotment. Late filing attracts escalating additional fees under Section 403, and on MCA21 v3 the delay is visible on your company's master data immediately, raising your scrutiny profile.

Can we issue bonus shares out of our profits or a revaluation reserve?
Bonus shares may be issued only from free reserves, the securities premium account, or the capital redemption reserve. Revaluation reserves are expressly prohibited, and a bonus issue cannot be made in lieu of a dividend.

Closing

Rights issue, private placement, and bonus shares solve three different problems, and the cost of confusing them ranges from a delayed-filing fee to a penalty equal to your entire fundraise. The route is a legal decision, not an administrative one — settle it before the money moves, not after. For a compliance audit of your company, visit pvtltd.co.

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