Introduction
Raising capital is a critical aspect of business growth, and companies often seek funding through various means. Section 62 of the Companies Act, 2013 plays a pivotal role in governing the issuance of shares by companies in India. This provision primarily deals with the issuance of shares through rights issue, employee stock option plans (ESOPs), and preferential allotment.
In this blog, we will explore Section 62 in detail, answering frequently asked questions, explaining its significance, and discussing how companies can leverage it effectively. Whether you are a business owner, investor, or corporate professional, this article will provide you with valuable insights into share issuance mechanisms under Indian corporate law.
Understanding Section 62 of the Companies Act, 2013
Section 62 of the Companies Act, 2013 regulates how companies can offer additional shares to existing shareholders, employees, or third parties. The key objectives of this provision include ensuring transparency, protecting shareholders’ rights, and maintaining fair capital-raising practices.
Section 62 is divided into three major parts:
- Rights Issue – Offering shares to existing shareholders in proportion to their existing holdings.
- Employee Stock Option Plans (ESOPs) – Granting stock options to employees as part of a compensation package.
- Preferential Allotment – Issuing shares to select investors or institutions on preferential terms.
Let’s dive deeper into each of these provisions and understand their implications.
1. Rights Issue Under Section 62(1)(a)
A rights issue is when a company offers new shares to existing shareholders in proportion to their current shareholding. This ensures that shareholders maintain their ownership percentage while allowing the company to raise capital efficiently.
Key Points About Rights Issue:
- The offer must be made through a notice specifying the number of shares offered, price, and acceptance timeline.
- The acceptance period should be at least 15 days and up to 30 days from the offer date.
- Shareholders have the option to accept, reject, or transfer their rights to another person.
- If shareholders do not accept the offer within the given period, the company can offer the shares to outsiders as per board discretion.
Why Companies Use Rights Issue:
- A cost-effective way to raise funds without going through the complexities of a public offering.
- Maintains shareholder confidence by offering them priority access to new shares.
- Helps in capital restructuring without increasing debt obligations.
2. Employee Stock Option Plan (ESOP) Under Section 62(1)(b)
ESOPs are a popular way for companies to reward and retain employees by offering them the opportunity to buy shares at a discounted price.
Key Aspects of ESOPs:
- The scheme must be approved by a special resolution in the general meeting.
- ESOPs can be granted to employees, directors, or officers of the company.
- The price and vesting period of shares are determined by the company’s ESOP policy.
- Helps in employee retention and motivation, aligning their interests with company growth.
Why Companies Use ESOPs:
- Encourages long-term commitment from employees.
- Attracts and retains top talent in the organization.
- Provides employees with an opportunity to share in the company’s success.
3. Preferential Allotment Under Section 62(1)(c)
Preferential allotment refers to the process where companies issue shares to specific investors, financial institutions, or strategic partners at a pre-determined price.
Key Requirements for Preferential Allotment:
- Requires approval through a special resolution in a general meeting.
- Issued at a pre-determined price, often higher than market value to ensure fairness.
- Used for raising funds from strategic investors, private equity firms, or venture capitalists.
Why Companies Use Preferential Allotment:
- Brings in strategic investors who can add value beyond just capital.
- Helps in raising large sums of capital quickly.
- Avoids market fluctuations associated with public offerings.
Frequently Asked Questions (FAQs) About Section 62
1. Can a company issue shares to outsiders directly under Section 62?
No, a company must first offer shares to existing shareholders through a rights issue. Only if they decline can the company issue shares to other investors.
2. What happens if shareholders do not subscribe to a rights issue?
The company can offer unsubscribed shares to third parties at the board’s discretion.
3. Is a special resolution required for all share issuances under Section 62?
A special resolution is mandatory for ESOPs and preferential allotments but not required for a rights issue.
4. How long does the rights issue process take?
The minimum acceptance period is 15 days, and companies must provide a reasonable timeline for shareholders to respond.
5. Can a private company issue ESOPs?
Yes, private companies can issue ESOPs, but they must follow approval and regulatory guidelines.
Conclusion
Section 62 of the Companies Act, 2013 is a crucial provision governing share issuance mechanisms for Indian companies. Understanding its components—rights issue, ESOPs, and preferential allotment—helps businesses make strategic capital-raising decisions while protecting shareholder interests.
For companies looking to expand, attract talent, or secure strategic investments, leveraging Section 62 effectively can provide a competitive edge. If you’re a business owner or investor, staying informed about these regulations ensures compliance and maximized growth opportunities.