How to Allot Further Shares After Incorporation: Rights Issue, Private Placement and PAS-3

Which route should you choose?

A rights issue offers new shares to existing shareholders in proportion to their holdings; the offer stays open for 15 to 30 days and shareholders can usually renounce in favour of others. It needs only a board resolution. A private placement offers shares to identified persons, typically new investors, and requires a special resolution, a valuation and strict process. Preferential allotments under section 62(1)(c) also follow private placement rules.

What are the private placement rules?

Offers can be made to at most 200 persons in a financial year, excluding qualified institutional buyers and employees under ESOPs. Each offer is made through a serially numbered PAS-4 letter and recorded in PAS-5. Money must come from the investor's own bank account into a separate bank account opened for the issue, and cannot be used until allotment.

Allotment must happen within 60 days of receiving the money. If not, the company must refund within 15 days after that, failing which interest at 12% a year applies from the 60th day.

Preparation checklist

Before you start, confirm the capital clause in the MoA and the AoA support the issue, including any pre-emption rights of existing investors. If authorised capital is insufficient, increase it first and file SH-7 within 30 days.

• Authorised capital headroom (SH-7 if needed)
• Board resolution approving the issue
• Registered valuer report (private placement or preferential)
• Special resolution and MGT-14 (private placement)
• PAS-4 offer letters and PAS-5 record
• Separate bank account for application money
• FEMA compliance if any investor is non-resident

What happens after allotment?

File PAS-3 with the list of allottees, board resolution and valuation report within the applicable deadline. Issue share certificates within two months, paying stamp duty as per state law, or credit shares to demat accounts if the company is not a small company. Update the register of members. For foreign investors, file FC-GPR on the RBI FIRMS portal within 30 days of allotment.

How are shares issued to foreign or related investors?

Allotments to non-residents must follow FEMA pricing, sectoral caps and the entry route, and are reported in FC-GPR within 30 days. Allotments to directors or their relatives are related-party transactions that may need disclosure and approvals. If any investor is from a country sharing a land border with India, prior government approval is needed under Press Note 3 of 2020 before you accept the money.

Timeline at a glance

Work backwards from the date you need the funds, because the special resolution, valuation report and investor KYC each take time to arrange, and banks may hold foreign remittances for checks.

Common mistakes

The most expensive errors are using application money before allotment, accepting cash or third-party payments, and missing the 60-day allotment window. Penalties under section 42 can extend to the amount raised. Also check that a private company issuing to more than 200 persons in aggregate does not breach its member limit.

Step by step

1. 1Check capital

   Confirm authorised capital and increase it if needed.

2. 2Choose route

   Decide between rights issue and private placement.

3. 3Valuation

   Get a registered valuer report for private placement or preferential issues.

4. 4Approvals

   Pass board and, for private placement, special resolutions; file MGT-14.

5. 5Make the offer

   Send the letter of offer or PAS-4; keep PAS-5.

6. 6Receive funds

   Collect money in the separate bank account from investors' own accounts.

7. 7Allot shares

   Allot within 60 days by board resolution.

8. 8File PAS-3

   File within 15 or 30 days and issue certificates or demat credits.