Corporate and Other Laws · Share Capital and Debentures

Private Placement, Rights and Bonus Issue (Sections 42, 62, 63) for CA Intermediate

Updated 4 October 2026 · Fact-checked

A company can raise or add to share capital by private placement (Section 42: offer to a select group of identified persons, not more than the prescribed number), a rights issue (Section 62(1)(a): offer to existing equity holders in proportion), or a bonus issue (Section 63: free shares out of reserves). Answer by naming the section, applying its conditions to the facts, and concluding.

Understand Private Placement, Rights and Bonus Issue

A company needs new capital, or wants to reward members, and the Act gives separate routes. Each route has its own conditions. Most exam questions give a fact pattern and ask whether the route was used properly.

Private placement (Section 42) is an offer of securities to a select group of persons identified by the Board, through a private placement offer-cum-application. The number of identified persons cannot exceed fifty or such higher number as may be prescribed, in a financial year. Qualified institutional buyers and employees under an ESOP scheme are excluded from this count. The offer cannot carry a right of renunciation. Money must come by cheque, demand draft or other banking channel, not cash. No public advertisement or marketing through media or agents is allowed.

Rights issue (Section 62(1)(a)) is an offer of further shares to existing equity shareholders, in proportion to their paid-up share capital. It protects them from dilution. The notice must give the number of shares offered and a time of not less than fifteen days (or such lesser number of days as may be prescribed) and not more than thirty days to accept. Unless the articles say otherwise, the offer includes a right to renounce the shares in favour of another person, and the notice must state this right. After the time expires, or on earlier refusal, the Board may dispose of the shares in a manner not disadvantageous to the shareholders and the company.

Bonus issue (Section 63) is the issue of fully paid-up shares to members, free, by capitalising reserves. It can be made out of free reserves, the securities premium account or the capital redemption reserve account. It cannot be made by capitalising reserves created by revaluation of assets. The company must meet conditions: authority in its articles, authorisation in general meeting on the Board's recommendation, no default on fixed deposits or debt securities, no default in employee statutory dues, and partly paid-up shares made fully paid. Bonus shares cannot be issued in lieu of dividend.

Preferential allotment is a further issue to any persons authorised by a special resolution under Section 62(1)(c), for cash or for consideration other than cash, where the price is fixed by the valuation report of a registered valuer. Rule-level details (such as Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014) are procedural, so state the section-level rule in answers and add rule details only if you are sure of them.

Key rules to remember

Private placement: persons: Identified persons ≤ 50 (or higher number as prescribed) in a financial year, excluding QIBs and ESOP employees; Breach means the issue is deemed a public offer (Section 42(11)).
Private placement: allotment time: Allot within 60 days of receiving application money; else refund within 15 days after those 60 days; If refund is late, interest at 12% p.a. runs from the expiry of the 60th day.
Private placement: return of allotment: File return with Registrar within 15 days of allotment; Money cannot be used until allotment is made and the return is filed. Late filing penalty is ₹1,000 per day, maximum ₹25 lakh.
Private placement: penalty for contravention: Penalty up to the lower of (amount raised, ₹2 crore); Applies to company, promoters and directors, plus refund with interest within 30 days of the penalty order.
Private placement: key restrictions: No renunciation; payment by banking channel, not cash; no public advertisement; separate bank account for application money; No fresh offer until earlier allotments are completed or the earlier offer is withdrawn or abandoned.
Rights issue: offer period: Offer open for not less than 15 days (or such lesser days as prescribed) and not more than 30 days; Notice must be sent at least 3 days before the issue opens, by registered post, speed post, electronic mode, courier or other mode with proof of delivery.
Rights issue: entitlement: Offer to equity holders in proportion to paid-up equity share capital held at the date of offer; Renunciation right is included unless articles provide otherwise.
Bonus issue: sources: Free reserves, securities premium account, capital redemption reserve account; Revaluation reserve cannot be capitalised.
Bonus issue: conditions: Articles authorise + general meeting authorises on Board recommendation + no default on deposits/debt securities + no default on employee statutory dues + partly paid shares made fully paid + prescribed conditions; Bonus shares cannot be issued in lieu of dividend.
Preferential allotment: Special resolution + price fixed by registered valuer's valuation report; Under Section 62(1)(c); may be for cash or consideration other than cash.

How to solve Private Placement, Rights and Bonus Issue questions

Use the same pattern for every question on this topic: identify the route, test each condition against the facts, and conclude.

1Identify the route in the facts: offer to selected persons (private placement), offer to existing equity holders (rights), free shares from reserves (bonus), or offer to any persons by special resolution (preferential).
2State the section: 42, 62(1)(a), 63 or 62(1)(c).
3List the conditions of that route in a short bullet list.
4Match each fact to a condition. Mark each as complied or breached. Watch numbers: 50 persons, 15 to 30 days, 60 days, 15 days.
5For bonus issues, check the source of reserves, articles, general meeting approval, defaults and partly paid shares.
6State the consequence of breach. For private placement beyond the permitted number, the issue is deemed a public offer.
7Write a one-line conclusion that answers the exact question asked.

Quickest way: Route, number, condition, consequence

When to use it: Use for MCQs and for the first two lines of any written answer.

MCQ: look for the trigger word. 'Identified persons' means Section 42. 'Existing shareholders in proportion' means Section 62(1)(a). 'Capitalising reserves' means Section 63.
Eliminate options with wrong numbers. Rights offer is 15 to 30 days, not 7 or 60. Private placement allotment is 60 days.
Eliminate options that allow revaluation reserve for bonus, cash payment in private placement, or renunciation in private placement.
Written answer format: Provision (section and rule), Facts (apply each condition), Conclusion (valid or not, and the consequence). Each part earns step marks.

Common mistakes in Private Placement, Rights and Bonus Issue

Saying private placement can be made to any number of persons.
Students remember 'select group' but forget the cap.
Fix: Remember: not more than fifty (or higher prescribed number) in a financial year, excluding QIBs and ESOP employees. Breach makes it a public offer.
Allowing renunciation in a private placement offer.
Students mix it up with the rights issue, where renunciation is a default right.
Fix: Private placement offer carries no right of renunciation. In rights issue it is included unless the articles say otherwise.
Using revaluation reserve for bonus shares.
It looks like a reserve, so students assume it is free.
Fix: Section 63 allows only free reserves, securities premium and capital redemption reserve. Revaluation reserve is expressly barred.
Forgetting to make partly paid shares fully paid before a bonus issue.
Students list authority and defaults but miss this condition.
Fix: Add it to your checklist: outstanding partly paid shares on the date of allotment must be made fully paid.
Mixing up the time limits.
Several periods (15, 30, 60 days) appear in this topic.
Fix: Rights offer: 15 to 30 days. Private placement allotment: 60 days. Refund: 15 days after that. Return of allotment: 15 days.
Treating a rights issue as always compulsory.
Students read 'shall be offered' without the other clauses.
Fix: Section 62(1) also allows an ESOP offer under clause (b) and a special-resolution route under clause (c). Rights offer to existing holders is the default, not the only route.

Worked examples

Example 1

Sunrise Ltd, an unlisted public company, wants to raise funds by private placement. The Board identifies 70 persons, none of whom is a qualified institutional buyer or an ESOP employee, and sends offer-cum-application letters to all of them within one financial year. Assume the prescribed limit is 200. Advise whether the issue is valid.

Show the solution

Provision: Section 42(2) allows private placement to identified persons not exceeding fifty or such higher number as may be prescribed, in a financial year, excluding QIBs and ESOP employees.
Facts: 70 persons exceed fifty, but the question assumes a prescribed higher limit of 200.
Application: 70 is within 200, so the number condition is met, subject to the prescribed conditions.
Other conditions to confirm: identified by the Board, offer-cum-application in the prescribed form, no renunciation, payment by banking channel, no public advertisement.
Consequence if the limit were crossed: under Section 42(11) the issue would be deemed a public offer.

Answer: The number condition is satisfied because 70 is within the assumed limit of 200. The issue is valid if the other Section 42 conditions are also met.

Example 2

Moon Ltd has the following: free reserves ₹40 lakh, securities premium account ₹10 lakh, revaluation reserve ₹25 lakh. Its articles authorise capitalisation. The general meeting approved a bonus issue on the Board's recommendation. There is no default in deposits, debt securities or employee dues. There are no partly paid shares. The Board wants to issue bonus shares of ₹60 lakh. Is this permitted?

Show the solution

Provision: Section 63(1) permits bonus shares out of free reserves, securities premium account or capital redemption reserve account.
Proviso: no bonus issue by capitalising reserves created by revaluation of assets.
Conditions under Section 63(2): articles authorise, general meeting authorises, no defaults, partly paid shares made fully paid. All are met on the facts.
Eligible reserves: free reserves ₹40 lakh + securities premium ₹10 lakh = ₹50 lakh.
Revaluation reserve of ₹25 lakh cannot be used.
Comparison: ₹60 lakh proposed is more than ₹50 lakh eligible.

Answer: Not permitted for ₹60 lakh. The maximum bonus issue is ₹50 lakh, because the revaluation reserve of ₹25 lakh cannot be capitalised.

Exam tips

Write the section number with every answer. Examiners look for Section 42, 62 or 63 by name.
For differences between rights and bonus issue, use four points: who gets it, whether money is paid, source, and whether renunciation applies. Give your answer as a short list.
In bonus issue questions, check the source of reserves first. Revaluation reserve is a favourite trap.
In private placement questions, check numbers, payment mode, advertising and renunciation before anything else.
If you are not sure of a rule number or a prescribed limit, state the rule from the section and say 'as prescribed'.

Practice questions from Share Capital and Debentures

Private Placement, Rights and Bonus Issue in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Private Placement, Rights and Bonus Issue: frequently asked questions

What is the maximum number of persons in a private placement under Section 42?

Not more than fifty or such higher number as may be prescribed, in a financial year. Qualified institutional buyers and employees offered securities under an ESOP scheme are excluded from the count. If the limit is breached, the issue is deemed a public offer.

What is the difference between a rights issue and a bonus issue?

A rights issue is an offer of new shares to existing equity holders in proportion to their holding, and they must pay for the shares. A bonus issue gives fully paid-up shares free by capitalising reserves. Rights shares can be renounced unless the articles say otherwise, while bonus shares are issued to members out of eligible reserves.

How long must a rights offer remain open under Section 62?

Not less than fifteen days (or such lesser number of days as may be prescribed) and not more than thirty days from the date of the offer. If it is not accepted in that time, it is deemed declined. The notice must be dispatched at least three days before the issue opens.

What is a preferential allotment?

It is a further issue of shares to any persons under Section 62(1)(c), authorised by a special resolution, for cash or other consideration. The price must be fixed by a registered valuer's valuation report. For procedural details under the Rules, rely on your ICAI study material.