Private Placement vs Rights Issue for Private Companies: Process, Pricing and Dilution
Private placement vs rights issue: offer to up to 200 chosen investors with valuation and PAS-4 vs pro-rata offer to existing shareholders for 15-30 days.
Short answer
Use a rights issue when existing shareholders will fund the company in proportion to their holdings: it is quicker, needs no valuation report under company law and avoids unequal dilution. Use a private placement, with a special resolution, registered valuer's report and PAS-4 offer letter, to bring in new investors or allot shares unequally. Both end with PAS-3 within 15 days.
- Rights issue law
- Section 62(1)(a), Companies Act
- Rights offer period
- 15 to 30 days
- Private placement law
- Sections 42 and 62(1)(c)
- Private placement limit
- Up to 200 persons in a financial year, excluding QIBs and ESOP allottees
- Private placement offer letter
- PAS-4
- Return of allotment
- PAS-3 within 15 days
How do they differ?
A rights issue offers new shares to all existing equity shareholders in proportion to their current holding. Shareholders can accept, decline or, unless the articles say otherwise, renounce their entitlement in favour of someone else. The offer must stay open for at least 15 and not more than 30 days. Private companies can shorten the period if at least 90% of members agree in writing or electronically.
A private placement is an offer to selected persons under section 42, usually combined with a preferential allotment under section 62(1)(c). It needs a special resolution, a valuation report from a registered valuer, a private placement offer letter in PAS-4 sent to identified persons, and subscription money received from the investor's own bank account into a separate bank account.
Side-by-side comparison
The table compares the two routes for an unlisted private company. FEMA pricing rules apply in addition whenever shares are issued to non-residents under either route, including pricing and reporting.
| Factor | Rights issue | Private placement |
|---|---|---|
| Offered to | All existing shareholders, pro rata | Identified persons, existing or new |
| Shareholder approval | Board resolution generally sufficient | Special resolution |
| Valuation report | Not required under company law | Registered valuer's report required |
| Offer document | Letter of offer | PAS-4 offer letter |
| Number of offerees | All shareholders | Up to 200 in a financial year, excluding QIBs and ESOP allottees |
| Offer period | 15 to 30 days; shorter with 90% consent in private companies | As per offer letter |
| Allotment deadline | After offer period | Within 60 days of receipt of money, or refund |
| Dilution | Proportionate if all subscribe | Unequal; existing holders diluted |
| Filings | PAS-3 within 15 days | MGT-14, PAS-3 within 15 days |
What are the pricing and tax points?
A rights issue can be priced below fair value because all shareholders get the same offer, though issues to non-residents must not be cheaper than to residents under FEMA. For private placements, the price is backed by the registered valuer's report, and allotments to non-residents must be at or above fair value under FEMA pricing guidelines.
The angel tax provision that taxed share premium above fair value was abolished from 2024-25, which removed a major risk for premium private placements to resident investors. Other income-tax provisions on receipt of shares below fair value can still apply to the recipient, so take advice on discounted allotments.
What goes wrong in practice?
Common errors in private placements include accepting money before the offer letter is issued, receiving funds in cash or from third-party accounts, using money before allotment, and missing the 60-day allotment deadline, after which money must be refunded within 15 days with interest. In rights issues, the usual error is not giving the full statutory offer period or ignoring renunciation rights in the articles.
Which should you choose?
The choice depends mainly on who is putting in money and whether everyone should keep the same percentage. These rules reflect common practice in Indian private companies and early-stage startups.
- Existing founders and shareholders funding pro rata: rights issue.
- New angel or VC investor coming in: private placement with preferential allotment.
- Some existing shareholders investing more than others: private placement, or a rights issue with renunciation.
- Need speed and minimal paperwork: rights issue, using the 90% consent route to shorten the period.
- Foreign shareholders involved: either route, but comply with FEMA pricing and file FC-GPR within 30 days.
Related services
Sources
- Private placement by private and unlisted public companies (TaxGuru)
- Private placement under the Companies Act 2013 (Kanakkupillai)
Written by the Refogo Editorial Team from the official sources above and checked on 2026-10-31. Laws, rates and due dates change, and authorities often extend deadlines, so confirm your own case with a qualified professional. This is general information, not legal or tax advice. Read our editorial policy or report an error to support@refogo.com.
Common questions
Is a valuation report needed for a rights issue?
Not under the Companies Act for a rights issue to existing shareholders. A valuation may still be needed for FEMA compliance where non-residents are involved.
How many investors can a private placement include?
Offers can be made to up to 200 persons in a financial year, excluding qualified institutional buyers and employees under an ESOP scheme.
Can a rights issue offer period be shortened?
Yes, for private companies, if at least 90% of members consent in writing or electronically. Otherwise it must be open for 15 to 30 days.
What happens if shares are not allotted within 60 days in a private placement?
The company must refund the money within 15 days after the 60-day period. Delay attracts interest at 12% a year from the 60th day.