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Key takeaways
- Section 62 of the Companies Act, 2013 governs all further issues of share capital by Indian companies.
- It governs three routes for issuing new shares: a rights issue offered proportionally to existing shareholders, an ESOP scheme for qualifying employees, and a preferential allotment to any identified persons such as investors or strategic partners.
- ESOP schemes require shareholders’ approval through a special resolution. For private companies, an MCA exemption permits an ordinary resolution.
- Preferential allotments require a special resolution and a valuation report from an IBBI-registered valuer for unlisted companies. Allotment must complete within 12 months of the resolution.
- When a company issues convertible debentures or loans with a conversion clause, shareholders approve the conversion terms upfront. If conversion actually happens, no fresh shareholder vote is required.
- Section 62(4) to (6) grant the government power to compulsorily convert government-issued debentures or loans into equity. A company may appeal to the NCLT within 60 days.
- Form PAS-3 must be filed within 30 days of allotment across all three routes. Form SH-6 must be maintained permanently for ESOP schemes.
What is Section 62 of the Companies Act, 2013?
Section 62 of the Companies Act, 2013 governs the increase of a company’s subscribed share capital through the issuance of further shares after incorporation.
It provides three principal routes: (i) a rights issue to existing shareholders on a proportionate basis under Section 62(1)(a); (ii) employee stock options under Section 62(1)(b); and (iii) issuance of shares to any persons under Section 62(1)(c), commonly structured as preferential allotments. Failure to comply with the applicable procedural and statutory requirements may expose the allotment to challenge, penalties, or regulatory action.
Route 1: Rights issue under Section 62(1)(a)
A rights issue is an offer of new shares to existing equity shareholders in proportion to their current paid-up shareholding. It works through a fixed ratio. For example, a shareholder holding 20% of the paid-up equity receives the right to subscribe to 20% of the new shares on offer.
How to conduct a rights issue
The company sends a letter of offer to each eligible shareholder specifying the shares available, the price, and the acceptance window. Under Rule 12A of the Companies (Share Capital and Debentures) Rules, 2014, this window must be at least seven days from the date of the offer, and under Section 62(1)(a)(i), not more than 30 days.
The offer letter must reach shareholders at least three days before the issue opens, despatched by registered post, speed post, or electronic mode, per Section 62(2).
Where 90% or more of a private company's members give written or electronic consent, both the minimum acceptance window and the minimum dispatch notice period can be shortened below the standard requirements. The standard window is seven days (per Rule 12A) with a 30-day maximum, and the standard dispatch notice is three days before the issue opens. With 90% consent, both periods can be reduced below these floors. This is useful when shareholders are few and aligned and the company needs to move quickly.
Accepting, declining, or renouncing a rights issue
Each shareholder can accept, decline, or renounce their entitlement in favour of another named person. Renunciation is the mechanism by which an outsider can subscribe to a rights issue, not because the company made an offer to them directly, but because an existing shareholder transferred their entitlement. Shares that remain unsubscribed after the window closes may be disposed of by the board in a manner not disadvantageous to the company or its shareholders, per Section 62(1)(a)(iii).
Board approval and filing requirements for rights issue
A rights issue of equity shares does not require a shareholder resolution. The board approves it. Section 62(1)(a) applies to equity shares. A rights issue of preference shares is governed separately and may require shareholder approval depending on the instrument terms.
After allotment, Form PAS-3 must be filed with the Registrar of Companies (RoC) within 30 days of the allotment date. Public companies must also file Form MGT-14 within 30 days of the board resolution. Share certificates (Form SH-1, the prescribed statutory form for share certificates) must be issued within two months of allotment, signed by at least two directors. For demat shares, the depository must be notified immediately on allotment.
Listed companies must additionally comply with SEBI's ICDR (Issue of Capital and Disclosure Requirements) Regulations, 2018, which prescribe pricing conditions and exchange disclosure requirements.
Route 2: Employee stock option scheme under Section 62(1)(b)
Section 62(1)(b) permits a company to issue shares to employees under an employee stock option scheme.
Who qualifies as an employee for ESOP scheme
Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 defines "employee" for ESOP purposes to include:
- A permanent employee of the company, whether based in India or abroad
- A director of the company, whether whole-time or part-time, excluding an independent director
- A qualifying employee or director of a subsidiary or a holding company,
Two categories are excluded: an employee who is a promoter or belongs to the promoter group, and a director who holds more than 10% of the outstanding equity shares, whether directly, through a relative, or through a body corporate.
Startup exception: For companies recognised under the DPIIT (Department for Promotion of Industry and Internal Trade) framework, both exclusions are waived for ten years from the date of incorporation, per Rule 12 as amended by GSR 127(E) dated 19 February 2019.
Shareholder approval for ESOP scheme
Section 62(1)(b) requires a special resolution. A special resolution under Section 114(2) of the Companies Act, 2013 is one where the votes in favour are at least three times the votes cast against the resolution.
However, the MCA's exemption notification for private companies (G.S.R. 464(E), dated 5 June 2015) permits private companies to use an ordinary resolution instead. The complication is that Rule 12(1) still reads: "the issue of Employees Stock Option Scheme has been approved by the shareholders of the company by passing a special resolution." Rule 12 has not been amended to reflect the exemption.
Until MCA amends Rule 12 or issues a clarification, the safer practice is to pass a special resolution even for private companies. This eliminates the risk that an investor's legal team or a future auditor takes a narrow view of the exemption.
ESOP vesting and exercise rules
Rule 12(6)(a) requires a minimum vesting period of one year between the date of grant and the date options vest. The exercise price (the price the employee pays when buying shares on exercise) is set by the company's scheme in conformity with applicable accounting policies.
Until shares are allotted on exercise, employees hold no voting rights and receive no dividends. The option confers a right to acquire shares, not ownership of them.
Key lifecycle provisions under Rule 12(8): options are non-transferable and cannot be pledged or hypothecated. On the death of an employee in service, all granted options vest immediately in the legal heirs or nominees. On permanent incapacitation while in service, all options granted to the employee till the date of incapacitation shall vest. On resignation or termination, unvested options lapse; vested options may be exercised within the period the scheme specifies.
When a separate shareholder resolution is required
Rule 12(4) requires a separate shareholder resolution (beyond the scheme-level approval) for two situations: options granted to employees of a subsidiary or holding company, and options granted to an identified employee in any single year equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) at the time of grant.
ESOP compliance requirements
The company must maintain a Register of Employee Stock Options in Form SH-6, recording all grants. Entries must be authenticated by the company secretary or a board-authorised person. On the filings side, Form MGT-14 must be filed within 30 days of the ESOP resolution, and Form PAS-3 within 30 days of each allotment upon exercise of the options.
For listed companies, Section 62(1)(b) is supplemented by the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, which add requirements on compensation committee oversight, scheme disclosures to stock exchanges, and annual ESOP reporting.
Route 3: Preferential allotment under Section 62(1)(c)
Section 62(1)(c) allows a company to issue shares to any identified persons (existing shareholders, new investors, promoters, or strategic partners) if authorised by a special resolution.
The board identifies allottees and the explanatory statement accompanying the meeting notice must disclose their names, the post-allotment shareholding pattern, the objects of the issue, the basis of price determination, and any change in control that would result.
For unlisted companies, the issue price must be determined by a valuation report from an IBBI-registered valuer (Insolvency and Bankruptcy Board of India, which registers valuers under the Companies (Registered Valuers and Valuation) Rules, 2017).
Allotment must be completed within 12 months of the special resolution, per Rule 13(2)(e). Preferential allotments made through private placement must also comply with Section 42 of the Act, including the prescribed limits on the number of offerees, subject to applicable exemptions.
EquityList's full guide to preferential allotment covers PAS-4, the 200-person cap, CCPS and CCD structures, pricing rules, and post-allotment filings.
Comparing the three routes
The most consequential practical difference is governance burden. A rights issue among existing shareholders can move faster because no general meeting is required. A preferential allotment requires 21 clear days' notice, an EGM or postal ballot, a special resolution, and a registered valuer's report before allotment can proceed.
Government conversion power (Sections 62(4) to (6))
Sub-sections (4) through (6), effective from 1 June 2016, address debentures issued to or loans obtained from a government body. If the government considers it necessary in the public interest, it may by order direct that those instruments be converted into equity shares, even if the original terms contained no conversion clause.
A company that finds the conversion terms unreasonable may appeal to the NCLT (National Company Law Tribunal) within 60 days of receiving the order.
Section 62(5) requires the government to consider the company's financial position and the applicable interest rates when setting terms, and Section 62(6) provides that where the conversion results in increase of the authorised share capital, the Memorandum of Association (MoA) is automatically treated as altered to reflect the higher authorised capital.
When Section 62 does not apply
Conversion of convertible debentures and loans: Section 62(3) exemption
Section 62(3) carves out an exception for the exercise of conversion options attached to debentures or loans previously issued by the company. It applies where the conversion terms were approved by shareholders through a special resolution before the issue of the debentures or the raising of the loan.
Accordingly, where a company has issued CCDs or raised a loan with a conversion clause and obtained the requisite prior approval, no fresh shareholder approval is required at the time of conversion. Upon conversion into equity shares, the board passes a resolution authorising the allotment, and Form PAS-3 must be filed within 30 days.
The Nidhi company exemption
Section 62 does not apply to Nidhi companies (mutual benefit companies that accept deposits from and lend exclusively to their members). Their restricted membership structure makes the capital-raising routes in Section 62 inapplicable.
FAQs on section 62 of Companies Act, 2013
What is the difference between Section 42 and Section 62 of the Companies Act, 2013?
Section 62 governs the further issue of share capital and prescribes which route a company must use: rights issue, ESOP, or preferential allotment. Section 42 governs private placement, setting out the conditions under which a company may offer securities to a select group of identified persons. The two sections work together: a preferential allotment under Section 62(1)(c) must also comply with Section 42, including the 200-allottee cap per security type per financial year. A rights issue under Section 62(1)(a) does not trigger Section 42 because it is offered proportionally to all existing shareholders, not to a select group.
What is Section 2 Clause 62 of the Companies Act, 2013?
Section 2(62) of the Companies Act, 2013 defines a "one person company," which is a company that has only one person as its member. This is a definitional provision in the interpretation section of the Act and is unrelated to Section 62, which governs the further issue of share capital. The two provisions are frequently confused because of their similar numbering.
