When a company already on its feet needs more capital, or wants to reward its members out of accumulated surplus, the Companies Act, 2013 channels it through two adjacent but distinct mechanisms. A rights issue under Section 62 is a further issue of shares for value, offered first to existing equity shareholders in proportion to their holdings — the statutory expression of the pre-emptive right. A bonus issue under Section 63 is the conversion of the company's own free reserves into fully paid-up shares handed to members without payment. The first raises fresh money and tests the fiduciary good faith of those who control the allotment; the second raises nothing, merely re-labelling reserves as share capital. This chapter sets out both regimes, the statutory conditions that hem them in, and the case law — from Nanalal Zaver to Needle Industries to Dale and Carrington — that decides when a further issue crosses into oppression.
The two sections sit in Chapter IV of the Act, "Share Capital and Debentures," and build on the foundational ideas covered in our notes on the introduction to company law and on the definitions of company, director and member. A reader who has internalised the separate-legal-personality principle from Salomon v. Salomon and Co. and the structure of authorised, issued, subscribed and paid-up capital will find Sections 62 and 63 fall naturally into place: they govern how a company moves money along that ladder once incorporation under the incorporation procedure is complete and the company is a going concern.
Statutory anchor and scheme
Section 62 is titled "Further issue of share capital" and applies "where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares." Section 63, titled "Issue of bonus shares," permits a company to "issue fully paid-up bonus shares to its members" out of specified reserves. The two provisions are conceptually opposite. Section 62 deals with the company seeking value from subscribers — the company's purse grows; Section 63 deals with the company giving value to members out of its own surplus — the company's purse is unchanged, only the composition of its net worth shifts from reserves to paid-up capital.
Both provisions presuppose an existing company with capital already issued. They are therefore distinct from the original subscription to the memorandum at incorporation, where the subscribers simply take the shares they have agreed to take. Once a company is running, any enlargement of its subscribed capital is a sensitive act: it can dilute existing holdings, shift voting control, and alter the balance of power between majority and minority. The Act's response is to make the pre-emptive right the default and to subject departures from it to special-resolution control and, in the case of bonus, to strict sourcing rules.
Further issue of capital — Section 62
Section 62(1) prescribes that further shares "shall be offered" in one of three ways. Clause (a) is the rights issue to existing equity shareholders. Clause (b) is an issue to employees under a scheme of employees' stock option, approved by a special resolution. Clause (c) is an issue "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, provided the price is determined by the valuation report of a registered valuer. The word "shall" makes clause (a) mandatory as the starting point: a company cannot bypass its own shareholders for a routine cash issue without travelling through the special-resolution gateway of clause (c).
This structure preserves, in statutory form, the common-law pre-emptive right. The premise is that a shareholder's proportionate stake — in capital, in dividends, and above all in votes — is a species of property that should not be diluted behind his back. By offering further shares first to existing holders pro rata, the law lets each member maintain his percentage if he is willing to pay for it, and lets him decide consciously to renounce or decline if he is not.
The rights issue — Section 62(1)(a)
The rights issue is governed by the detailed machinery of Section 62(1)(a) read with its sub-clauses. The shares must be offered to persons who, on the date of the offer, are holders of equity shares, "in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares." The offer is made by a letter of offer and is subject to three conditions.
First, under sub-clause (i), the offer must be "made by notice specifying the number of shares offered and limiting a time not being less than fifteen days 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." The fifteen-to-thirty-day window is the statutory acceptance period; silence at its expiry is treated as a declinature. For a private company, this fifteen-and-thirty-day window may be shortened where members holding at least ninety per cent of the shares give consent in writing or in electronic mode.
Second, under sub-clause (ii), the offer "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 offer notice must contain a statement of this right of renunciation — unless the articles of the company otherwise provide. Renunciation is what gives a rights entitlement its economic value: a shareholder who does not wish to subscribe may transfer the entitlement to a third party, often for consideration.
Third, under sub-clause (iii), after the expiry of the acceptance time, or on earlier receipt of an intimation from the offeree that he declines, "the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company." This is the residuary power over un-taken rights, and it is fenced by the express standard that the disposal must not disadvantage either the body of shareholders or the company.
Section 62(2) adds a dispatch requirement: the notice of offer "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." The proof-of-delivery requirement and the three-clear-day lead time are designed to ensure that every shareholder has a real opportunity to consider the offer before the issue opens.
Renunciation and the Board's residuary power
The renunciation right and the Board's residuary disposal power under sub-clause (iii) operate as a sequence. A shareholder presented with a rights offer has three choices: subscribe and pay; renounce the entitlement to a nominee (who then subscribes and pays); or decline, expressly or by letting the period lapse. Only when shares are declined — neither subscribed nor renounced — does the Board's residuary power engage. At that point the directors may dispose of the un-taken shares, but the statute binds them to a manner "not dis-advantageous to the shareholders and the company."
That standard is not an empty form. It prevents directors from using the lapse of a rights offer as a backdoor to allot the leftover shares to themselves or to a favoured group at the offer price, ignoring that the un-taken shares might fetch a premium or might be more fairly re-offered. The phrase "not dis-advantageous to the shareholders and the company" requires the directors to weigh the interest of the general body of members, not merely the company's need for cash. The fiduciary discipline that the Supreme Court applied to directors in Dale and Carrington Investment (P) Ltd. v. P.K. Prathapan, (2005) 1 SCC 212, governs this residuary disposal just as it governs any other exercise of the power to allot shares.
ESOP and preferential allotment — Section 62(1)(b) and (c)
Clause (b) permits an issue of shares to employees under an employees' stock option scheme, "subject to the conditions as may be prescribed," but only if approved by a special resolution. This is the statutory home of ESOPs: companies may not casually issue shares to employees outside the rights mechanism unless the members, by a three-fourths majority, have sanctioned a scheme.
Clause (c) is the preferential-allotment route — the means by which a company brings in a strategic investor, a private-equity participant, or any identified person, whether or not an existing shareholder. It requires a special resolution and, crucially, that "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." The registered-valuer requirement is the integrity check: because a preferential allotment departs from pro-rata pre-emption, the law insists that the price be independently certified so that existing shareholders are not diluted at an undervalue. For unlisted companies the valuation report is mandatory; listed companies are additionally governed by the SEBI pricing norms.
Pre-emption and the bona fide test
The pre-emptive right and the duty of directors who issue further shares were settled long before the 2013 Act, in Nanalal Zaver v. Bombay Life Assurance Co. Ltd., AIR 1950 SC 172. There, the directors of the company resolved to issue the unissued portion of the authorised capital pro rata to existing shareholders. The motive was, in part, to forestall an outsider who had been buying up shares from acquiring control. The Supreme Court held that the power to issue further shares is a fiduciary power that must be exercised bona fide for the benefit of the company as a whole; but it also held that an issue is not invalid merely because one of its effects, or even one of its purposes, is to maintain the existing balance of control, provided the directors act in good faith and in the company's interest. The decision establishes both the fiduciary character of the issuing power and the corresponding pre-emptive expectation of existing shareholders.
The lesson carried into the 2013 Act is that the issuing power is held in trust. A further issue motivated solely by the directors' desire to entrench themselves or to dilute an inconvenient shareholder, with no genuine corporate need for the capital, is liable to be struck down. Conversely, a bona fide issue for a real corporate purpose is not invalidated by the incidental fact that it preserves or alters control. The test is the directors' good faith and the company's interest, judged objectively.
Rights issues as oppression
The leading authority on a rights issue challenged as oppression is Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., AIR 1981 SC 1298. The Indian company needed to reduce the foreign holding company's stake to comply with the foreign-exchange regime of the day. The Board resolved on a rights issue, but the holding company complained that the manner of the issue — including the short notice and the structuring of the offer — was calculated to dilute its shareholding and amounted to oppression under Section 397 of the Companies Act, 1956.
The Supreme Court laid down the enduring test: the person complaining of oppression must show that he has been constrained to submit to conduct lacking in probity, conduct that is unfair to him and prejudicial to his proprietary rights as a shareholder. On the facts, the Court found procedural irregularity in the rights issue but, balancing the equities, set aside the impugned allotment and directed that shares be re-offered to the existing shareholders — including the holding company — at a premium, with the right of renunciation preserved. Needle Industries is therefore authority for two propositions a rights issue must respect: the offer must reach the shareholder with a genuine opportunity to take it up, and the right of renunciation must be real.
The fiduciary side of the same coin appears in Dale and Carrington Investment (P) Ltd. v. P.K. Prathapan, (2005) 1 SCC 212. There, the managing director engineered an allotment of further shares to himself, converting a minority into a majority and reducing the principal shareholder's stake, without proper notice or disclosure. The Supreme Court held that a director owes a fiduciary duty in the exercise of the power to allot shares; an allotment made by a director to himself to acquire control, behind the back of the other shareholders and without a genuine need for capital, is a breach of that duty and an act of oppression. The allotment was set aside. Read together, Needle Industries and Dale and Carrington mark the outer boundary of Section 62: a further issue that ignores pre-emption, denies renunciation, or serves the personal control-ambitions of those who allot is liable to be undone.
Conversion of loans and debentures
Section 62(3) preserves a company's ability to issue shares on the conversion of loans or debentures, where the terms of the loan and the option to convert were approved by a special resolution before the loan was raised. Sub-sections (4) to (6) deal with the special case of conversion directed by the Central Government in the public interest in respect of debentures or loans from the Government: the Government may direct conversion of such debentures or loans into shares, and a company aggrieved by the terms may apply to the Tribunal for an order that the terms be altered to be more reasonable. These provisions exist so that a routine debt-to-equity conversion, pre-sanctioned by the members, is not snared by the pre-emption machinery of clause (a). The principle is that where shareholders have, in advance and by special resolution, agreed that a lender may later convert, the subsequent issue on conversion needs no fresh rights offer.
Bonus shares — Section 63
Section 63 governs the bonus issue. A bonus issue is, in substance, a book-keeping operation: the company capitalises a portion of its reserves and issues fully paid-up shares to existing members in proportion to their holdings, charging them nothing. No cash enters the company; the company's net worth is unchanged. What changes is its composition — reserves shrink and paid-up share capital grows by an equal amount. The shareholder receives more shares, but because every member receives them pro rata, no one's proportionate interest moves. The market price per share typically adjusts downward to reflect the larger number of shares; the aggregate value of a member's holding is, in theory, unchanged the moment after the bonus.
Section 63(1) provides that "a company may issue fully paid-up bonus shares to its members, in any manner whatsoever," but confines the sources to three: "(i) its free reserves; (ii) the securities premium account; or (iii) the capital redemption reserve account." The word "fully paid-up" is important: bonus shares are always issued fully paid, which is why a partly paid-up bonus share is a contradiction the Act does not permit.
Permissible sources and the revaluation bar
The proviso to Section 63(1) is the single most examined point in this topic: "no issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets." Free reserves, the securities premium account and the capital redemption reserve account represent realised or genuine surplus that can properly be converted into capital. A revaluation reserve, by contrast, is an unrealised, notional surplus arising merely from a re-statement of asset values; permitting its capitalisation would dilute the link between paid-up capital and real, distributable surplus. The 2013 Act therefore bars it outright.
This is a conscious change from the earlier law. In Bhagwati Developers Pvt. Ltd. v. Peerless General Finance and Investment Co. Ltd. (decided 15 July 2013), the Supreme Court, applying Section 205 of the Companies Act, 1956, upheld a bonus issue that Peerless had funded by capitalising a revaluation reserve, holding that the 1956 Act then permitted utilisation of a reserve arising from revaluation of assets for the purpose of issuing fully paid-up bonus shares. That holding turned on the 1956 framework. Under the 2013 Act the position is reversed by the express proviso to Section 63(1): a bonus issue out of a revaluation reserve is now impermissible. For an exam, the safe formulation is — under the 1956 Act revaluation reserve could be capitalised (Bhagwati Developers); under the 2013 Act it cannot (proviso to Section 63(1)).
Conditions under Section 63(2)
Section 63(2) lays down the conditions precedent to a bonus issue. No company may capitalise its reserves for the purpose of issuing bonus shares unless: (a) it is authorised by its articles; (b) it has, on the recommendation of the Board, been authorised in the general meeting of the company; (c) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it; (d) it has not defaulted in respect of the payment of statutory dues of the employees, such as contribution to provident fund, gratuity and bonus; and (e) the partly paid-up shares, if any, outstanding on the date of allotment, are made fully paid-up.
Each condition has a rationale. Authorisation in the articles and by the members ensures the issue rests on the company's constitution and the shareholders' will; the company's articles, examined in our note on the articles of association, must contain the enabling power. The bar on default in respect of deposits, debt securities and employee dues prevents a company from dressing up reserves as bonus capital while its creditors and workers go unpaid — a bonus is a benefit to members and cannot leap ahead of prior claims. The requirement that partly paid shares be made fully paid before the bonus avoids the anomaly of issuing fully paid bonus shares on top of a partly paid base.
Section 63(3) closes two gaps. It provides that the bonus shares "shall not be issued in lieu of dividend" — a company cannot substitute a bonus for the dividend it owes, because the two are different in kind: a dividend distributes profit out of the company to the member, while a bonus retains the surplus and merely capitalises it. The sub-section also makes clear that a bonus issue, once recommended by the Board and announced, cannot be subsequently withdrawn, protecting the legitimate expectation of members.
Listed companies and the SEBI overlay
For a company whose shares are listed, Sections 62 and 63 are supplemented by the SEBI (Issue of Capital and Disclosure Requirements) Regulations. A listed rights issue must observe the ICDR timeline, including the fixing of a record date to identify entitled shareholders and a minimum subscription requirement; SEBI has also created a framework under which the rights entitlement is credited to shareholders in dematerialised form and may itself be renounced or traded on the stock exchange. A listed bonus issue must be implemented within fifteen days of the Board's approval where no shareholder approval is required, and once announced it cannot be withdrawn — a regulatory echo of Section 63(3).
The unlisted company is governed by the Companies Act and the rules made under it alone; the listed company carries the additional SEBI overlay. For judiciary and CLAT-PG purposes the Companies Act provisions are primary, but the candidate should know that the record date, minimum subscription, and dematerialised renunciation features belong to the SEBI ICDR layer and not to Section 62 itself.
Rights versus bonus — the distinctions
The contrast between the two issues is a recurring examination theme, and it is best held in mind as a set of paired oppositions. A rights issue is a sale of shares for value; a bonus issue is a gift of shares out of reserves. In a rights issue money flows from the shareholder to the company; in a bonus issue no money flows at all. A rights issue increases the company's paid-up capital and its cash; a bonus issue increases paid-up capital but leaves total net worth untouched, merely reclassifying reserves as capital.
A rights issue can alter proportionate holdings, because a shareholder who does not subscribe or renounce sees his percentage fall; a bonus issue cannot, because every member receives bonus shares pro rata. A rights issue carries a right of renunciation, the entitlement having economic value that can be transferred; a bonus issue carries no such right, the shares simply arriving fully paid. A rights issue is the principal pre-emption mechanism of Section 62; a bonus issue is the capitalisation mechanism of Section 63, available only out of free reserves, securities premium and the capital redemption reserve, and never out of revaluation reserve or in lieu of dividend.
| Feature | Rights issue (s. 62) | Bonus issue (s. 63) |
|---|---|---|
| Nature | Sale of shares for value | Capitalisation of reserves; shares free |
| Cash flow | Shareholder pays the company | No money changes hands |
| Effect on net worth | Increases capital and cash | Net worth unchanged; reserves → capital |
| Proportionate holding | May shift if not taken up | Unchanged — pro rata to all members |
| Renunciation | Right of renunciation available | No renunciation; shares fully paid |
| Source | Fresh subscription money | Free reserves, securities premium, CRR |
| Approval | Board; special resolution for 62(1)(b)/(c) | Articles + Board recommendation + general meeting |
MCQ angle — the recurring points
A handful of propositions recur across previous-year papers. First, the rights-issue acceptance window under Section 62(1)(a)(i) is not less than fifteen days and not more than thirty days from the date of the offer; the offer is deemed declined if not accepted within that time. Second, the offer notice must be dispatched at least three days before the opening of the issue, with proof of delivery, under Section 62(2). Third, a preferential allotment to outsiders under Section 62(1)(c) requires a special resolution and a registered-valuer's price.
On the bonus side: bonus shares may be issued only out of free reserves, the securities premium account, or the capital redemption reserve account, and never out of revaluation reserve (proviso to Section 63(1)); bonus shares cannot be issued in lieu of dividend (Section 63(3)); a bonus issue, once recommended and announced, cannot be withdrawn; and a company in default on its deposits, debt securities, or employee statutory dues cannot issue bonus shares (Section 63(2)). Finally, the case-law triad — Nanalal Zaver (fiduciary issuing power and pre-emption), Needle Industries (rights issue, renunciation, oppression test) and Dale and Carrington (allotment by a director to himself is oppression) — is the standard set of authorities, with Bhagwati Developers as the contrast point on revaluation reserve between the 1956 and 2013 Acts.
Practical takeaways
Three points for the practitioner. First, when advising on a further issue, default to the rights route under Section 62(1)(a): it is mandatory unless the company travels through the special-resolution gateway of clause (c) for a preferential allotment or clause (b) for an ESOP. Build the offer letter around the fifteen-to-thirty-day window, the express statement of the renunciation right, and the three-day dispatch lead time; an issue that cuts these corners invites a Needle Industries challenge. Second, where a preferential allotment to a director or a connected person is contemplated, document the genuine corporate need for the capital and obtain a clean registered-valuer's report — Dale and Carrington shows how readily an allotment that benefits the allottee's control will be set aside as oppression.
Third, on the bonus side, run the Section 63(2) checklist before recommending the issue: authority in the articles, Board recommendation, general-meeting sanction, no default on deposits, debt securities or employee dues, and partly paid shares made fully paid. Confine the source to free reserves, securities premium, or the capital redemption reserve, and never touch the revaluation reserve. Remember that the bonus cannot stand in for a dividend and cannot be withdrawn once announced. These two sections, read with the fiduciary discipline that runs through company law from Nanalal Zaver onward, together govern how a living company grows its capital — by asking its members to pay, or by turning its own surplus into shares. For the wider scheme of which they form part, return to the Companies Act notes hub.
Frequently asked questions
What is the difference between a rights issue and a bonus issue?
A rights issue under Section 62(1)(a) of the Companies Act, 2013 is a further issue of shares for cash, offered first to existing equity shareholders in proportion to their paid-up capital; the shareholder must pay the issue price and may either subscribe, renounce, or decline. A bonus issue under Section 63 is the capitalisation of the company's free reserves, securities premium account, or capital redemption reserve into fully paid-up shares distributed free to existing members; no money flows from the shareholder to the company. A rights issue raises fresh capital and may shift proportions if some shareholders do not take up their entitlement; a bonus issue raises no capital and leaves every member's proportionate holding unchanged.
What is the minimum and maximum notice period for a rights issue under Section 62?
Under Section 62(1)(a)(i), the offer to existing shareholders must be made by notice specifying the number of shares offered and limiting a time, not being less than fifteen days and not exceeding thirty days from the date of the offer, within which the offer must be accepted or it is deemed declined. For a private company, the periods of fifteen and thirty days may be reduced if ninety per cent of the members agree in writing or electronically. Under Section 62(2), the offer notice must be dispatched through registered post, speed post, courier, or electronic mode with proof of delivery, at least three days before the opening of the issue.
Can bonus shares be issued out of revaluation reserve under the Companies Act, 2013?
No. The proviso to Section 63(1) expressly bars the issue of bonus shares by capitalising reserves created by the revaluation of assets. This is a deliberate departure from the position under the Companies Act, 1956. In Bhagwati Developers Pvt. Ltd. v. Peerless General Finance and Investment Co. Ltd. (Civil Appeal decided 15 July 2013), the Supreme Court, applying the 1956 Act, upheld a bonus issue funded from a revaluation reserve. That permission no longer survives: under the 2013 Act, bonus shares may be issued only out of free reserves, the securities premium account, or the capital redemption reserve account.
Is the right of renunciation an essential feature of a rights issue?
Yes. Section 62(1)(a)(ii) requires that the offer notice contain a statement of the shareholder's right to renounce the shares offered to him in favour of any other person, unless the articles otherwise provide. The Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., AIR 1981 SC 1298, treated the right of renunciation as integral to a fair rights issue: it set aside the impugned allotment and directed that fresh shares be offered to existing shareholders, including the holding company, with the right of renunciation preserved. Denying renunciation, or structuring the issue so that the majority cannot meaningfully exercise it, can amount to oppression.
Can a company issue further shares to outsiders without first offering them to existing shareholders?
Only by following the routes in Section 62(1)(c) — a preferential allotment to any persons, whether or not existing shareholders, if authorised by a special resolution and at a price determined by the valuation report of a registered valuer — or Section 62(1)(b), an issue under an employee stock option scheme approved by special resolution. The default rule is pre-emption: shares must first go to existing equity holders. A directed allotment to outsiders that dilutes a shareholder without a bona fide corporate purpose is vulnerable. In Dale and Carrington Investment (P) Ltd. v. P.K. Prathapan, (2005) 1 SCC 212, the Supreme Court set aside an allotment made by a director to himself to gain majority control, holding it a breach of fiduciary duty and an act of oppression.
What conditions must be satisfied before a company issues bonus shares under Section 63?
Section 63(2) requires that the bonus issue be authorised by the company's articles; recommended by the Board and then authorised in general meeting; that the company has not defaulted in payment of interest or principal on fixed deposits or debt securities; that it has not defaulted in payment of statutory dues to employees such as contribution to provident fund, gratuity, and bonus; and that any partly paid-up shares outstanding are made fully paid-up. Section 63(1) confines the sources to free reserves, the securities premium account, and the capital redemption reserve account, and bars use of revaluation reserves. Section 63(3) provides that, once recommended and announced, the bonus issue cannot be withdrawn, and bonus shares shall not be issued in lieu of dividend.