Rights Issue Under Section 62(1)(a): The Bridge-Round Move That Triggers a ₹1 Lakh PAS-3 Penalty

In December 2025, a Bengaluru private company closed a small internal top-up from its two founders and one angel to buy six months of runway. Clean round, friendly terms, no lawyers needed. The board approved it in a morning meeting. Then everyone got busy shipping. Thirty-five days after the shares were allotted, someone finally filed Form PAS-3. That five-day slip past the 30-day line under Section 39 turned a routine rights issue into an e-adjudication notice from the Registrar and a penalty order against the company and every officer in default. A rights issue under Section 62(1)(a) is the cheapest, fastest way an Indian private company can raise capital from the people already on its cap table. It is also the route where founders most often forget that "cheap and fast" still means "on the clock".

What a rights issue actually is (and why founders reach for it)

Section 62(1)(a) of the Companies Act, 2013 governs the "further issue of shares". When a company wants to issue new equity shares, the default rule is that it must first offer them to its existing equity shareholders, in proportion to the shares each already holds. That proportional offer is the rights issue. If you own 40% today and the company issues 100 new shares, 40 of them must be offered to you before anyone outside is invited in.

For a funded startup, this route solves a specific problem. When the next priced round is six to twelve months away and you only need a short runway extension, you do not want to run a full private placement with its valuation reports, offer letters in Form PAS-4, separate bank accounts and PAS-3 filings tied to a placement. A rights issue lets the founders and existing investors put in more money quickly, in proportion to what they already hold, without disturbing the cap table's ownership ratios. It is the standard mechanism behind an internal bridge round, a founder's capital infusion, or a pro-rata top-up from an existing fund exercising its rights.

The trade-off is that a rights issue does not, by itself, bring in a new outside investor at a negotiated price. It is capital from the room you are already in. That is exactly why it is fast, and exactly why the compliance around it is often treated as an afterthought.

The problem: a "simple" round with a hard statutory clock

The reason a rights issue gets founders into trouble is not the offer mechanics. It is the filing at the end. The moment shares are allotted, Section 39(4) read with Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 gives the company 30 days to file Form PAS-3, the return of allotment, with the Registrar of Companies. Miss it, and Section 39(5) applies a penalty of ₹1,000 for every day the default continues, up to a ceiling of ₹1 lakh, and it lands on the company and on each officer who was in default, not just the company.

This is not a theoretical risk. Registrars across India now run these as e-adjudication matters directly off the MCA V3 system, which timestamps the allotment date and the PAS-3 filing date automatically. In one 2025-26 adjudication, a company that filed PAS-3 thirty-five days after a rights issue allotment, five days late, received a show-cause notice and a penalty order under Section 39(5). The system does not care that the round was friendly or small. It sees a date and a date, subtracts one from the other, and issues the notice.

There is a second, quieter failure mode. If the board never properly documents the offer, the acceptance window, and the renunciations, the allotment itself can be challenged later, usually during due diligence for the very priced round the bridge was meant to reach. A messy rights issue two years ago becomes a "please clean this up before we wire funds" note in the data room. That is the deal-killer version of the same mistake.

The rights issue timeline, step by step

Here is the sequence and the statutory clock attached to each stage. Read it as a countdown, because that is how the Registrar reads it.

What actually changes on the paperwork, and what does not

A lot of the anxiety around a rights issue comes from confusing it with a private placement or a preferential allotment, which are far heavier. So it helps to be precise about what a Section 62(1)(a) rights issue does not require.

No shareholders' special resolution.For a straight pro-rata rights issue of equity shares, the board's approval is enough. You do not need to call a general meeting or pass a special resolution the way you would for a preferential allotment under Section 62(1)(c).

No valuation report, in the normal case.Because the shares are offered to all existing shareholders in proportion to their holdings, the price does not confer any special advantage on one group, so a registered valuer's report under Section 62(1)(c) is not required. The exception worth flagging: if Indian Accounting Standards (Ind AS) apply to the company, or the offer is not strictly pro-rata, valuation questions come back into play.

No MGT-14 for the board resolution, if you are a private company.The 5 June 2015 exemption notification removed the requirement for private companies to file MGT-14 for board resolutions passed under Section 179(3). The allotment and issue resolutions sit there, so a pure private-company rights issue usually needs no MGT-14. If your articles are amended to shorten the offer window, or any special resolution is passed, that filing obligation can reappear, so check before you assume.

Section 42 does not apply.The private placement machinery (PAS-4 offer letter, PAS-5 record, a separate escrow-style bank account, the cap on number of offerees) is switched off for a rights issue to existing members. This is the single biggest reason founders pick this route for a bridge.

What you absolutely still need: a properly convened board meeting, a written letter of offer with a compliant window, money in before allotment, the PAS-3 filing inside 30 days, share certificates inside two months, stamp duty paid, and the register of members updated. The reason it feels light is that most of the heavy machinery is switched off, not because there is no machinery at all.

The penalties, by section

These are the numbers that turn up in adjudication orders. Keep them where your finance team can see them before, not after, the round.

What you must do now: the founder's checklist

If you are about to raise a bridge or top-up through a rights issue, run this sequence. It is written for the person who will actually sit in the board meeting, not for a textbook.

1. Confirm you have authorised capital headroom.If the new shares push you past your authorised share capital, you first need to increase it (an ordinary resolution and Form SH-7) before the rights issue. This is the most common reason a round stalls on day one.
2. Fix the ratio and price at the board meeting.Decide shares offered per share held, the price, the record date, and the exact opening and closing dates. Record it in the minutes under SS-1. Keep the price defensible even though no valuer's report is required.
3. Send a real letter of offer.To every existing equity shareholder, by a mode you can prove: registered post, speed post, courier or email with delivery confirmation. Diarise that it must land at least three days before the offer opens.
4. Run the window for 15 to 30 days.If you need it shorter, collect written or electronic consent from members holding 90% of shares before you compress it. Do not simply assume a private company can skip the window.
5. Handle renunciations in writing.If a shareholder gives up their right in favour of a co-founder or the fund, capture it on paper. Check the articles first; some restrict renunciation.
6. Receive the money before you allot.Allotment against a promise to pay is a classic due-diligence red flag. Bank the funds, then pass the allotment resolution.
7. File PAS-3 within 30 days of allotment.This is the one date on this page that produces a penalty order. Treat it as the deadline, not the target.
8. Issue SH-1 certificates within two months and pay stamp duty.Stamp duty on issue of share certificates is 0.005% of the value under the uniform rate, collected through your state's e-stamping system.
9. Update the register of members and your cap table.The statutory register under Section 88 is the document an investor's lawyer will ask for first.
10. If any shareholder is a non-resident, add the FEMA layer.A rights issue to a non-resident brings in Form FC-GPR reporting on the RBI FIRMS portal within 30 days of allotment, and the pricing guidelines under the foreign investment rules. That is a separate clock running alongside PAS-3.

The deeper implication

According to CS Sapna Malpani, the rights issue is quietly becoming the most scrutinised of the "easy" corporate actions, precisely because it looks easy. On the MCA V3 platform, PAS-3 is a straight-through-processing form: the allotment date and the filing date are captured by the system, and the gap between them is visible without a human reading a single document. That makes late filing one of the simplest defaults for a Registrar to adjudicate at scale, and the volume of e-adjudication orders on delayed returns of allotment reflects it.

The forward view is that this tightens rather than loosens. As more filings move to straight-through processing on V3, the compliance edge shifts from "did you file the right form" to "did you file it on the right day". A founder who internalises the 30-day PAS-3 rule and the two-month certificate rule removes almost all of the penalty risk from a rights issue. The one who treats the round as done the moment the money lands is the one who gets the notice.

How a rights issue compares with the routes founders confuse it with

Founders routinely mix up the three ways a private company issues fresh shares. The differences decide how heavy the compliance is, so it is worth seeing them side by side.

For a fuller side-by-side, see the detailed breakdown in rights issue vs private placement vs preferential allotment, and the filing mechanics in the PAS-3 return of allotment penalty guide. If your round involves outside money rather than existing holders, the Section 42 private placement guide is the one to read instead.

Sources and references

• Section 62 and Section 39, Companies Act, 2013, India Code (indiacode.nic.in)
• Companies (Prospectus and Allotment of Securities) Rules, 2014, Rule 12, Ministry of Corporate Affairs
• ICSI, Presentation on Rights Issue, Private Placement and Preferential Allotment, Institute of Company Secretaries of India
• Private company exemptions notification dated 5 June 2015 (MGT-14 / Section 179(3)), Ministry of Corporate Affairs
• ROC e-adjudication orders on delayed PAS-3 filings, 2025-26, MCA Adjudication Orders

Frequently asked questions

Does a private company need a special resolution for a rights issue under Section 62(1)(a)?

No. For a straight pro-rata rights issue of equity shares to existing shareholders, a board resolution is enough. The company does not have to call a general meeting or pass a special resolution, which is what separates a rights issue from a preferential allotment under Section 62(1)(c). You will only reach a special resolution if you also amend the articles or take some other step that independently requires shareholder approval. This is the main reason founders choose a rights issue for a quick bridge round.

What is the penalty for filing PAS-3 late after a rights issue?

Under Section 39(5) of the Companies Act, 2013, a late or missed return of allotment attracts ₹1,000 for every day the default continues, capped at ₹1 lakh, and it is levied on the company and on each officer in default. The return must be filed within 30 days of allotment. Registrars now adjudicate these off the MCA V3 system, which compares the allotment date with the filing date automatically. A 2025-26 order penalised a company for filing PAS-3 thirty-five days after a rights issue allotment, only five days late.

Do I need a valuation report for a rights issue?

In the normal case, no. Because a rights issue is offered to all existing shareholders in proportion to their holdings, the price does not give any group a special benefit, so the registered valuer's report required for a preferential allotment is not needed. The price should still be defensible and recorded in the board minutes. The exception is where Indian Accounting Standards apply to the company, or the offer is not strictly pro-rata, in which case valuation questions return.

How long must the rights issue offer stay open?

The offer must remain open for not less than 15 days and not more than 30 days under Section 62(1)(a)(i). A private company can go below the 15-day floor only if members holding 90% of the shares give their consent in writing or electronically. The letter of offer must also reach shareholders at least three days before the offer opens, under Section 62(2). Compressing the window without the 90% consent is a common and avoidable mistake.

Can a shareholder give their rights to someone else?

Yes. Section 62(1)(a)(ii) gives a shareholder the right to renounce the offer, wholly or partly, in favour of another person, unless the company's articles of association restrict it. In practice this is how a co-founder or an existing fund ends up taking more than their strict pro-rata share when other shareholders do not want to participate. Always check the articles first, and capture every renunciation in writing so the allotment holds up in later due diligence.

Does a rights issue count as a private placement under Section 42?

No. A rights issue to existing members is governed by Section 62, and the private placement machinery under Section 42, namely the PAS-4 offer letter, the PAS-5 record, the separate bank account and the cap on the number of offerees, does not apply. This is precisely why the compliance is lighter. If instead you are issuing shares to new outside investors who are not existing shareholders, you are into Section 42 private placement or Section 62(1)(c) preferential allotment territory, and the heavier requirements come back.

What extra compliance applies if a rights issue includes a non-resident shareholder?

A rights issue to a non-resident brings the FEMA layer on top of the Companies Act steps. The company must report the allotment in Form FC-GPR on the RBI FIRMS portal within 30 days of allotment, and the issue price must meet the pricing guidelines under the foreign investment rules. This runs as a separate clock alongside the 30-day PAS-3 filing, so a cross-border rights issue has two deadlines to hit, not one. Missing the FC-GPR filing carries its own late submission fee and compounding exposure under FEMA.