Rights issue under consideration other than cash

This query is : Resolved

sourabh gupta (Querist)
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08 August 2016 Dear all,

We are in a situation wherein we r required to allot shares for consideration other than cash. however we cannot go for private placements due to certain issues. and now we contemplate to go for Rights issue and then ask the existing shareholders not to exercise there option. once the option is not exercised, we then plan to conduct a board meeting and then allot shares to our selected buyer for consideration other than cash(as once the shares are not bought under rights issue, board can allot shares to anyone in the interest of the comapny). I request the learned members of the group to guide whther the transaction would voilate any provisions of the act.

sourabh gupta

sourabh gupta (Querist)
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09 August 2016 Its on urgent basis.

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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22 July 2025 This is an important and tricky situation you’re describing regarding allotment of shares for consideration other than cash via a Rights Issue route followed by allotment to a third party.

Here’s a detailed legal perspective:

Scenario Recap:
You want to allot shares for consideration other than cash.

Cannot do a private placement directly (due to certain constraints).

Planning to first offer shares via Rights Issue to existing shareholders.

Expect that shareholders do not exercise their rights.

Then, conduct a Board Meeting and allot shares to a selected buyer (third party) for non-cash consideration.

Question: Does this violate any Companies Act provisions?

⚖️ Legal Analysis under Companies Act, 2013:
1. Rights Issue is a Pre-emptive Right
Section 62(1)(a) mandates a company to first offer shares to existing shareholders proportionally before offering to others.

If shareholders do not subscribe within prescribed time, shares can be offered to others (including third parties).

2. Allotment for Consideration Other than Cash
Section 62 does not specifically restrict the mode of consideration in Rights Issue.

However, Section 62 and Section 42 (Private Placement) must be carefully complied with regarding:

Offer letter contents.

Pricing.

Timing.

Mode of payment.

3. Allotment of Shares to Third Party After Rights Issue
If rights shares remain unsubscribed, the company may offer those shares to others (including third parties).

This is permitted only if it is done within the timelines prescribed by law and subject to terms of the original offer.

4. Non-Cash Consideration Issues
Section 62(1)(c) and Section 56 permit allotment of shares for consideration other than cash.

However, allotment for consideration other than cash must be:

Authorized by special resolution in the general meeting (except in certain cases).

Valued fairly (valuation report from a registered valuer is generally required).

Proper disclosures and approvals obtained.

5. Risk of Violation
If you offer rights shares to existing shareholders, but anticipate they won’t subscribe just to allow allotment to a third party for non-cash consideration:

This can be challenged as circumvention of the law.

Rights issue should be genuine and made in good faith.

Offering shares on rights issue terms but intending to allot to third party for non-cash may be considered fraudulent or unfair.

6. Time Limit and Procedure
Rights issue offer remains open for a maximum of 15 days from the date of the offer.

If not subscribed, shares can be offered to others within 6 months from the date of the Board Resolution.

7. Board Approval & Shareholder Approval
Board can allot shares to others after rights issue, but:

Check if special resolution is required for allotment for consideration other than cash.

Ensure valuation and disclosures as per rules.

🚩 Recommendations
Avoid using Rights Issue to bypass Private Placement regulations.

If you want to allot shares for non-cash consideration:

Follow proper Private Placement (Section 42) or Preferential Allotment route.

Obtain necessary shareholder approvals and valuation report.

Ensure all procedural compliances with MCA and SEBI (if applicable).

Take legal advice and document valuation and approvals clearly.

If rights issue is made, ensure shareholders are genuinely offered the option to subscribe.

If shares remain unsubscribed, the subsequent allotment should be justified, transparent, and compliant.

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