The legal architecture governing the increase of subscribed capital in Indian corporate law is anchored in the principle of pre-emptive rights, ensuring existing shareholders retain their proportional economic interest. Under Section 62 of the Companies Act, 2013, a rights issue is the primary mechanism for capital expansion.
This provision mandates that shares must first be offered to existing equity shareholders in proportion to their paid-up share capital. A critical legal phase begins when these shareholders decline the offer or fail to respond within the stipulated 15 to 30-day notice period. The disposal of this unsubscribed portion represents a significant area of board discretion, requiring a balance between corporate funding needs and the protection of shareholder interests.
The Legislative Architecture of Section 62 and the Shift in Board Discretionary Standards
The authority for the disposal of unsubscribed shares is found in Section 62(1)(a)(iii) of the Companies Act, 2013. This clause states that after the notice period expires or upon receipt of a declination, the Board of Directors may dispose of the shares in a manner that is not disadvantageous to the shareholders and the company. This phrasing is more flexible than the “most beneficial to the company” standard found in Section 81(1) of the Companies Act, 1956.
The current “not disadvantageous” standard implies a broader range of permissible actions, requiring only that the chosen path does not cause harm to stakeholders. While the Act does not define “disadvantageous,” judicial guidance suggests that if the board acts in good faith to serve the company’s interests, incidental benefits to directors do not render the action invalid.
The 2025 SEBI Framework and the Integration of Specific Investors
The regulatory environment for listed companies was fundamentally altered by the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Amendment) Regulations, 2025. This amendment introduced the concept of “specific investors” under Regulation 77B. A specific investor is defined as any investor eligible to participate in the rights issue whose name is disclosed by the issuer in its offer documents and advertisements under Regulation 84.
This allows listed companies to identify third-party investors who can subscribe to the unsubscribed portion or receive renouncements from promoters. One of the most significant operational changes is the reduction of the rights issue timeline to just 23 working days from the date of board approval. Furthermore, the 2025 amendments removed the aggregate value threshold of fifty crore rupees, meaning all rights issues by listed companies now fall under the ICDR Regulations.
Mechanism of Allotment and the Statutory Waterfall Principle
The allotment of shares in a rights issue follows a structured hierarchy established by Regulation 90 of the ICDR Regulations. Priority is first given to those who have applied to subscribe to their eligible rights entitlements. Second, allotment is made to persons in whose favor rights entitlements have been renounced. Finally, any remaining undersubscribed portion can be allotted to other applicants, including specific investors and existing shareholders who applied for additional shares.
The 2025 amendments clarified that specific investors are placed at the bottom of this waterfall, ensuring they only receive shares that are truly residual. Procedural safeguards require specific investors to apply on the first day of the issue opening before 11:00 A.M., with the issuer disclosing these applications to the stock exchange by 11:30 A.M. to ensure transparency. For unlisted companies, the board must file Form PAS-3, the Return of Allotment, with the Registrar of Companies within thirty days, attaching the board resolution and the list of allottees.
Foreign Exchange Management and Pricing Norms for Non-Residents
When the disposal of the unsubscribed portion involves a non-resident, the process is subject to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules). The January 2025 amendment to the RBI Master Direction on Foreign Investment clarified that the unsubscribed portion of a rights issue can be issued to non-resident third parties. Such allotments must adhere to entry routes, sectoral caps, and the pricing guidelines in Rule 21 of the NDI Rules.
Rule 7A of the NDI Rules mandates that if a shareholder renounces rights in favor of a non-resident, the transaction must occur at a price not less than the fair market value. For unlisted companies, this valuation must be performed by a chartered accountant or a SEBI-registered merchant banker using internationally accepted pricing methodologies on an arm’s length basis.
Judicial Precedents and the Boundaries of Fiduciary Authority
Indian courts have established that the board’s discretion to dispose of unsubscribed shares is protected as long as it aligns with the company’s best interests. In Needle Industries (India) Ltd v. Needle Industries Newey (India) Holding Ltd, 1981 AIR 1298 the Supreme Court held that raising capital via a rights issue is valid even if it results in a change of control, provided the motive is not solely to perpetuate directors’ power.
Similarly, in Nanalal Zaver v. Bombay Life Assurance Company, 1950 AIR 172, the Court emphasized that directors are in a fiduciary position and must act for the primary benefit of the company. A 2025 ruling by the National Company Law Appellate Tribunal in Tumkur Vajram Shetty Jayawanth v. Agile Labs Pvt. Ltd., TA (AT) No.28/2022 reaffirmed that while the board has broad discretion under Section 62, it must be exercised transparently and cannot be used as a tool for oppression.
Professional Concerns Regarding Regulatory Arbitrage
The 2025 SEBI amendments have highlighted potential regulatory arbitrage between rights issues and preferential allotments. A preferential allotment under Section 62(1)(c) requires a special resolution from shareholders, strict pricing based on volume-weighted average price (VWAP), and a mandatory lock-in period. In contrast, disposing of the unsubscribed portion of a rights issue under Section 62(1)(a)(iii) only requires a board resolution and currently lacks a statutory lock-in period.
This allows companies to conduct what is essentially a selective allotment with less regulatory friction. Legal experts have proposed recalibrations, such as introducing “soft lock-ins” for specific investors and establishing clearer pricing guidelines for allotments to non-shareholders to prevent the misuse of significant discounts.
Procedural Formalities and Compliance Timelines
For listed companies, the 2026 regulatory framework emphasizes digital compliance and speed. Recent updates from January 2026, including the Master Circular for Listing Obligations and Disclosure Requirements (LODR), mandate that credit of securities must be effected in dematerialized form within 30 days for various investor service requests. Furthermore, a Jan 30, 2026, SEBI circular introduced a special window for the transfer and dematerialization of physical securities sold or purchased prior to April 01, 2019, which requires a mandatory lock-in of one year from the date of registration.
Following the allotment of the unsubscribed portion, the company must file Form PAS-3 with the Registrar of Companies and ensure share certificates are issued or demat accounts credited within two months. In cases of foreign investment, Form FC-GPR must be filed through the FIRMS portal within thirty days of the allotment.
Fiscal Implications of Deemed Income under Section 56
The disposal of the unsubscribed portion at a price lower than the fair market value can trigger tax liabilities under Section 56(2)(x) of the Income Tax Act, 1961. If a person receives shares for a consideration that is less than the aggregate fair market value by more than fifty thousand rupees, the difference is taxable as “income from other sources” for the recipient.
While proportionate allotments in a rights issue are generally exempt because no real benefit accrues to the shareholder, the selective allotment of the unsubscribed portion to third parties or specific shareholders may be viewed as a transfer of value. Boards must ensure that the pricing for such residual shares is justifiable under Rule 11UA of the Income-tax Rules to avoid subjecting investors to unforeseen tax burdens.
Strategic Applications for Preference Shareholders and Conversion Rights
Preference shareholders do not have a statutory pre-emptive right to participate in an equity rights issue under Section 62(1)(a). However, a company may allow them to acquire equity by disposing of the unsubscribed portion to them after the offer to equity shareholders has been declined.
Alternatively, preference shareholders can be made eligible by acquiring a nominal amount of equity shares before the record date. If the preference shareholder is a non-resident, the board must ensure that any renunciation or direct allotment complies with the fair market value pricing guidelines mandated by FEMA. This strategy allows companies to align the interests of different classes of investors or facilitate a capital restructuring within the existing framework.
Conclusion
The evolution of the Indian regulatory framework for rights issues reflects a concerted effort to balance corporate flexibility with investor protection. The 2025 SEBI amendments have formalized the role of specific investors and the board’s power to allocate residual equity, significantly accelerating the fundraising process to a 23-working-day cycle.
While the “not disadvantageous” standard under Section 62(1)(a)(iii) provides directors with broad discretionary power, it is increasingly constrained by transparency requirements, such as early-morning disclosure of specific investor applications and mandatory dematerialization norms updated in early 2026. As the distinction between rights issues and preferential allotments blurs, the board’s fiduciary duty to ensure fair pricing and justifiable allocation remains the primary legal safeguard against the risks of regulatory arbitrage.
Decisions on the disposal of unsubscribed portions in rights issues reflect the same principles of board accountability and shareholder control that underpin Removal of Directors: Corporate Accountability in India, highlighting how statutory discretion operates within corporate governance limits.