Issuing New Shares Without Offering Them to Existing Shareholders First: What Section 62 Actually Requires

A founder closes a small bridge round. A friendly investor agrees to put in ₹40 lakh for fresh equity, the board passes a resolution, the company files PAS-3, and shares are allotted within a week. Clean and fast — except the company had three other shareholders who were never told. Eighteen months later, when a larger investor runs due diligence, the lawyers flag it: the allotment violated Section 62 of the Companies Act, 2013. The cap table is now a problem, the round is delayed, and a minority shareholder who feels diluted has leverage he should never have had.

This is one of the most common — and most quietly damaging — compliance failures in Indian private companies. Founders assume that because they control the board, they can issue shares to whomever they want. Section 62 says otherwise. Here is what the law actually requires, what goes wrong when it is ignored, and the exact steps to do a rights issue correctly.

What the law actually requires

Section 62 of the Companies Act, 2013 governs the "further issue of share capital." The core rule is a pre-emptive right: when a company proposes to increase its subscribed capital by issuing new shares, those shares must first be offered to existing equity shareholders in proportion to their current holding. This is not optional courtesy — it is the statutory default.

Section 62(1)(a) lays out the mechanics for a rights issue to existing members. The offer must be made by a notice (the "letter of offer") that specifies the number of shares offered and gives the shareholder a period to accept — not less than 15 days and not more than 30 days from the date of the offer. Under Section 62(2), this notice must be dispatched at least three days before the offer opens, through registered post, speed post, courier, or electronic mode. If a shareholder does not respond within the offer period, the offer is deemed declined, and only then can the directors dispose of those unsubscribed shares in a manner not disadvantageous to the shareholders or the company (Section 62(1)(a)(iii)).

There are only three lawful routes to issue fresh shares without a proportionate rights offer to all existing members:

• ESOPs — issue to employees under a scheme approved by a special resolution, governed by Section 62(1)(b) read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.
• Preferential allotment / private placement — issue to any person (including outside investors) under Section 62(1)(c), but only if authorised by a special resolution and priced on the basis of a registered valuer's report. For private placements, Sections 42 and 62(1)(c) and Rule 13 apply together.
• Conversion of loans or debentures into shares, where that conversion was approved by a special resolution before the loan was raised.

A crucial relaxation exists for private companies: under a 2015 MCA notification, the rights-issue notice period and dispatch timeline under Section 62(1) and 62(2) can be shortened if 90% of the members give their consent in writing or electronically. This is the legitimate "fast track" — but it requires documented consent from 90% of members, not silence and not a board resolution alone.

The single biggest misconception is this: a board resolution is enough to issue shares. It is not. A rights issue to existing shareholders can be done by board resolution, but any allotment to an outside investor or any non-proportionate allotment requires a special resolution (75% of votes) passed in a general meeting, plus a valuation report. Skipping the shareholder approval is where most companies fall.

Practical implications — what actually happens when this is ignored

The penalties operate on two levels: the statutory fine and the much larger commercial damage.

Statutory penalty. Section 62 does not carry its own dedicated penalty clause, so a contravention is caught by the residual penalty under Section 450 of the Companies Act, 2013: the company and every officer in default are liable to a penalty of up to ₹10,000, with a further ₹1,000 per day for continuing default, subject to a maximum of ₹2,00,000 for the company and ₹50,000 for an officer. If the allotment to outsiders also breached the private placement rules under Section 42, the consequences are far heavier — Section 42(10) allows a penalty that can extend to the amount raised through the offer or ₹2 crore, whichever is lower, plus a requirement to refund the money.

MCA21 v3 exposure. Every share allotment is reported in Form PAS-3 (Return of Allotment), which must be filed within 30 days of allotment. PAS-3 on the MCA21 v3 portal now requires the type of allotment, the authorising resolution details, and — for preferential allotments — the valuation report particulars. An allotment claimed as a rights issue but actually made to a non-shareholder, or one filed without the underlying special resolution (Form MGT-14), creates an inconsistency that the v3 system's straight-through-processing checks are designed to surface. A mismatch between the MGT-14 filed (or not filed) and the PAS-3 is exactly the kind of red flag that triggers scrutiny.

The commercial damage. This is what actually hurts. A defective allotment clouds the cap table. In any future fundraise, M&A, or ESOP grant, a diligence lawyer will find the gap, and the company is forced into a rectification exercise — often requiring the cooperation of the very minority shareholder who was diluted without consent. That shareholder can also approach the National Company Law Tribunal (NCLT) under Sections 241–242 alleging oppression and mismanagement, and the Tribunal has the power to set aside the allotment entirely. Investors have walked away from deals over precisely this issue.

Step-by-step: how to issue shares correctly

For a rights issue to existing shareholders (Section 62(1)(a)):

• Confirm the company has sufficient authorised capital. If not, alter the capital clause of the Memorandum by an ordinary resolution first and file Form SH-7 within 30 days.
• Convene a board meeting and pass a resolution approving the rights issue, the ratio, the price, and the letter of offer.
• Dispatch the letter of offer to every existing equity shareholder, keeping the acceptance window between 15 and 30 days (or use the 90%-member-consent route to shorten it, with consents on file).
• Receive application money, hold a board meeting to allot the shares, and update the Register of Members.
• File Form PAS-3 with the MCA within 30 days of allotment.
• Issue share certificates (Form SH-1) within two months of allotment and pay applicable stamp duty.

For an allotment to an outside investor (preferential allotment under Section 62(1)(c) + Section 42):

• Obtain a valuation report from a registered valuer to fix the price.
• Convene a general meeting and pass a special resolution authorising the issue; file Form MGT-14 within 30 days.
• Issue the private placement offer letter in Form PAS-4 to the identified investor(s) and maintain the record in Form PAS-5.
• Receive subscription money only through banking channels into a separate bank account — never in cash, and never utilised before allotment.
• Allot within 60 days of receiving the money (else refund within 15 days, after which interest at 12% p.a. applies).
• File Form PAS-3 within 30 days of allotment, attaching the valuation report and resolution details.

Closing

Pre-emptive rights are not a technicality — they are the legal backbone of a clean cap table, and the single most common place founders create a problem that only surfaces years later at the worst possible moment. Get the resolution, the offer letter, the valuation, and the PAS-3 right the first time.

For a compliance audit of your company, visit pvtltd.co

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See Also

• Lending Between Your Own Group Companies: Section 185 or Section 186? What the Companies Act Actually Requires
• "We charge our UK parent whatever is convenient": What arm's-length pricing actually requires
• Leaving Form AOC-2 blank: What the Companies Act actually requires for related-party disclosure

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