The three ways a private company issues fresh shares differ by who can receive them and how. A rights issue offers shares to existing shareholders in proportion to what they already hold. A preferential allotment issues shares to a specific, chosen group — often a new investor — and needs a special resolution and a registered-valuer report. A private placement is the procedure under Section 42 used to carry out an issue to a select group of identified people. In practice a preferential allotment to a new investor is done by following the private placement process.
| Factor | Rights issue | Preferential allotment | Private placement |
|---|---|---|---|
| Provision | Section 62(1)(a) | Section 62(1)(c) | Section 42 |
| Who can receive shares | Existing shareholders, pro-rata | A chosen group — existing or new | A select group of identified persons |
| Shareholder resolution | Board resolution; no special resolution | Special resolution | Special resolution |
| Valuation report | Not required | Required (registered valuer) | Required |
| Offer document | Letter of offer to members | — | Private placement offer letter (PAS-4) |
| Typical use | Topping up capital from existing owners | Bringing in an investor on agreed terms | The procedure behind a preferential allotment |
Rights issue — the simplest route
A rights issue under Section 62(1)(a) offers new shares to the people who already own the company, in proportion to their existing holding. Because the offer goes to existing members at a pre-agreed price, it does not need a special resolution and does not require a valuation report. It is the cleanest way to raise more capital from the founders and existing shareholders themselves. Each shareholder can take up their entitlement, decline it, or — if the articles allow — renounce it to someone else.
Preferential allotment — bringing in an investor
A preferential allotment under Section 62(1)(c) is an issue of shares to a specific group of people chosen by the company, rather than pro-rata to everyone. This is the route used when a new investor comes in, or when shares go to a particular existing shareholder on negotiated terms. It needs a special resolution of the shareholders and a valuation report from a registered valuer supporting the price. Preferential allotment answers the question of to whom and why.
Private placement — the procedure
Private placement under Section 42 is best understood as the procedure, not a separate purpose. It is how a company makes an offer of securities to a select group of identified persons who are not the general public. It involves a private placement offer letter in Form PAS-4, keeping the subscription money in a separate bank account, a cap on the number of people the offer can go to in a year, and filing the return of allotment in PAS-3. The company cannot use the money until PAS-3 is filed.
The key point that confuses founders: a preferential allotment to a new investor is carried out by following the Section 42 private placement process. They are not competing alternatives — the preferential allotment is the “what”, and private placement is the “how”. A rights issue, by contrast, sits outside the Section 42 process because it goes to existing members.
Which route applies to your raise
- Raising more capital from existing owners only → rights issue. Simplest, no valuation, no special resolution.
- Bringing in a new investor or issuing to a chosen party → preferential allotment, executed through the private placement procedure — special resolution, valuation report, PAS-4, separate bank account, PAS-3.
Whichever route you use, the share certificates, stamp duty, statutory registers and — if the investor is non-resident — the FC-GPR filing all still follow. Getting the route right at the term-sheet stage avoids re-papering a round later.
Frequently asked questions
What is the difference between a rights issue and a preferential allotment?
A rights issue offers shares to existing shareholders in proportion to their holding and needs only a board resolution with no valuation report. A preferential allotment issues shares to a chosen group, often a new investor, and needs a special resolution and a registered-valuer report.
Is a private placement the same as a preferential allotment?
Not exactly. Preferential allotment is the purpose — issuing shares to a select group under Section 62(1)(c). Private placement under Section 42 is the procedure used to carry it out, involving a PAS-4 offer letter and PAS-3 return of allotment.
Does a rights issue need a valuation report?
No. Because a rights issue is offered to existing shareholders in proportion to their holding, it does not require a registered-valuer report. A preferential allotment and a private placement do.
What forms are involved in a private placement?
The private placement offer letter in Form PAS-4 and the return of allotment in Form PAS-3. The subscription money is held in a separate bank account and cannot be used until PAS-3 is filed.
Reviewed by CS Sapna Malpani, a practising Company Secretary in Bangalore who handles share issues and fundraising compliance for private companies. This is general information, not legal advice. About Sapna Malpani.
Last reviewed: May 2026.