Strategic Management and Corporate Finance · Raising of Funds from Equity and Procedural Aspects - Public Funding

Equity Share Capital and Sources of Equity Funding

Updated 11 October 2026 · Fact-checked

Equity share capital is the owners' capital of a company, raised by issuing equity shares. Holders get voting rights and residual profits, and bear the highest risk. A company raises it through public routes (IPO, FPO, rights issue) or private routes (private placement, preferential allotment, QIP, ESOPs). Answer by naming the route, its law and its limits.

Understand Equity Share Capital and Sources of Equity Funding

Equity share capital is the money a company raises from its owners by issuing equity shares. Equity shareholders are the real owners. They have no fixed return and no fixed repayment date. They are paid dividend only when the company decides to pay it, and they are paid in liquidation only after all creditors and preference shareholders.

Key features of equity capital:
- Residual claim: equity holders share the profit left after all other claims.
- Voting rights: they usually control the company through votes at general meetings.
- Permanent capital: it is not repaid during the life of the company, except through lawful buy-back or capital reduction.
- Limited liability: a shareholder loses at most the unpaid amount on the shares held.
- No compulsory dividend: no charge on profits and no default risk, which makes equity safe for the company but costly.

Equity capital has several terms you must separate. Authorised capital is the maximum stated in the memorandum. Issued capital is the part offered to investors. Subscribed capital is the part investors have agreed to take. Paid-up capital is the amount actually paid on the shares. Equity shares can also be issued with differential voting rights, as sweat equity, as bonus shares or as ESOPs, subject to the conditions that apply to each.

Sources of equity funding divide into two groups. Public funding means offering shares to the general public: an initial public offer (IPO), a follow-on or further public offer (FPO), and, for listed companies, a rights issue to existing holders. Private funding means private placement, preferential allotment, qualified institutions placement (QIP), and investment by venture capital, private equity or angel investors. Internal sources such as retained earnings also add to equity, but they are not new issues.

Under section 62 of the Companies Act, 2013, a company with share capital that wants to increase its subscribed capital by issuing further shares must offer them in one of three ways. First, to existing equity holders in proportion to their paid-up capital (a rights issue). Second, to employees under an employees' stock option scheme, with a special resolution. Third, to any persons, if a special resolution authorises it and the price is fixed by the valuation report of a registered valuer. This is the legal base for most further equity issues.

Key rules to remember

Rights offer to existing holders (s.62(1)(a)): Offer to equity holders in proportion to paid-up share capital, by notice specifying number of shares; The notice must give a time of not less than fifteen days (or such lesser number as prescribed) and not more than thirty days from the date of the offer. If not accepted within it, the offer is deemed declined.
Right of renunciation: Offer deemed to include right to renounce in favour of any other person, unless articles provide otherwise; The notice must contain a statement of this right.
Dispatch of rights notice (s.62(2)): Dispatch at least 3 days before the opening of the issue; Mode: registered post, speed post, electronic mode, courier or any other mode with proof of delivery, to all existing shareholders.
Disposal of unaccepted shares (s.62(1)(a)(iii)): Board may dispose of them in a manner not disadvantageous to the shareholders and the company; This applies after the time expires or on earlier intimation of decline.
Further issue to any persons (s.62(1)(c)): Special resolution + price fixed by registered valuer's report; Applies for cash or for consideration other than cash. Chapter III and prescribed conditions must be complied with.
ESOP route (s.62(1)(b)): Special resolution + prescribed conditions; Shares go to employees under an employees' stock option scheme.
Convertible debenture or loan option (s.62(3)): Conversion option exempt from s.62 if terms approved by special resolution before issue of debentures or raising of loan; The approval must come before the debentures are issued or the loan is raised.
Producer company share capital (s.378ZB): Share capital consists of equity shares only; holding as far as may be in proportion to patronage; Unlike an ordinary company, no preference shares.

How to solve Equity Share Capital and Sources of Equity Funding questions

Use this method for any question on equity capital or the choice of an equity route. Follow the case-based pattern: provision, analysis, conclusion.

1Identify what is asked: nature of equity, types, or the choice and procedure of a funding route.
2Classify the company: listed or unlisted, public or private, existing shareholders or new investors, and whether the issue is for cash or other consideration.
3Name the route: IPO, FPO, rights issue, private placement, preferential allotment, QIP, ESOP or venture and private equity funding.
4State the governing provision. For further issue, cite section 62 and say which of clauses (a), (b) or (c) applies.
5Apply the conditions to the facts: approval needed (board or special resolution), notice period, mode of dispatch, valuation report, pricing.
6Test each fact against the rule and spot the breach, for example a notice period of ten days or no valuer report.
7Conclude clearly: compliant or not, and what the company must do to correct it.
8Add a practical compliance point, such as the resolution, the offer notice record or the allotment return.

Quickest way: Route, clause, condition

When to use it: Use it for short case questions when you have about five minutes.

Write the route in one line.
Write the section 62 clause that fits: (a) existing holders, (b) employees, (c) any persons.
List two or three conditions: notice 15 to 30 days, dispatch 3 days before opening, special resolution, valuer's price.
Compare the facts and state the conclusion in one sentence.

Common mistakes in Equity Share Capital and Sources of Equity Funding

Treating equity as having a fixed dividend or fixed repayment date.
Students mix equity with preference shares and debentures.
Fix: Remember that equity is residual: dividend is discretionary and capital is not repaid during the company's life.
Confusing authorised, issued, subscribed and paid-up capital.
The four terms sound alike and are learnt as a list.
Fix: Think of a funnel: authorised is widest, then issued, subscribed and paid-up.
Stating the rights notice period as a fixed 15 days.
Students remember only the lower limit.
Fix: Say not less than fifteen days (or such lesser number as prescribed) and not more than thirty days.
Forgetting the valuer's report when shares are issued to any persons under section 62(1)(c).
Students remember only the special resolution.
Fix: Write both: special resolution and price determined by a registered valuer's report.
Applying section 62 to conversion of debentures or loans without checking the exception.
Students treat every share issue the same way.
Fix: Check section 62(3): conversion under an option is outside the section if a special resolution approved the terms before the debentures were issued or the loan was raised.
Saying a producer company can issue preference shares.
Students carry over rules from ordinary companies.
Fix: Section 378ZB says the share capital of a producer company consists of equity shares only.

Worked examples

Example 1

Ganga Textiles Ltd, an unlisted public company, wants to issue 50,000 further equity shares. On 1 March it sends offer letters to existing equity shareholders by speed post, stating the number of shares offered and giving 20 days to accept. The issue opens on 2 March. Examine compliance with section 62.

Show the solution

Route: the further issue goes first to existing equity holders in proportion to their paid-up capital, which is section 62(1)(a).
Acceptance period: 20 days lies within the limit of not less than fifteen days (or such lesser number as prescribed) and not more than thirty days. This condition is met.
Dispatch: speed post is a permitted mode. The notice must be dispatched at least three days before the issue opens.
Facts: the notice was sent on 1 March and the issue opens on 2 March. That is only one day before opening.
Conclusion on dispatch: the three-day requirement of section 62(2) is breached.
Renunciation: the notice must also state the right to renounce, unless the articles provide otherwise. The facts do not mention it, so this must be checked.

Answer: The acceptance period and the mode of dispatch comply, but dispatch one day before opening breaches section 62(2). The company should reschedule the opening to at least three days after dispatch and include the renunciation statement.

Example 2

Himalaya Foods Pvt Ltd wants to allot 10,000 equity shares to Mr Rao, an outside investor, for cash. The board has fixed a price based on its own estimate and passed a board resolution. Advise the company.

Show the solution

Route: Mr Rao is not an existing holder or an employee, so the issue falls under section 62(1)(c), further issue to any persons.
Approval: section 62(1)(c) requires authorisation by a special resolution. A board resolution alone is not enough.
Price: the price must be determined by the valuation report of a registered valuer, subject to Chapter III and prescribed conditions. The board's own estimate does not satisfy this.
Rights offer: if the offer is to go to Mr Rao only, the special resolution is what permits it, and it may or may not include existing holders.
Practical step: obtain the valuer's report, pass the special resolution in general meeting, then allot and complete the filings.

Answer: The proposed allotment is not valid as planned. The company must pass a special resolution and fix the price on a registered valuer's report before allotting 10,000 shares to Mr Rao.

Exam tips

Quote section 62 by clause: (a) rights, (b) employees, (c) any persons. Examiners reward this precision.
Always give both limits of the rights-offer period and the three-day dispatch rule.
Use the case pattern: provision, facts, conclusion, then one drafting or compliance step.
For features, give five clear points rather than a long paragraph.
Link public routes to the chapter on public issue and private routes to private placement, and avoid mixing their rules.

Practice questions from Raising of Funds from Equity and Procedural Aspects - Public Funding

Equity Share Capital and Sources of Equity Funding in other exams

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

Equity Share Capital and Sources of Equity Funding: frequently asked questions

What are the main features of equity share capital?

Equity capital gives ownership, voting rights and a residual claim on profit and assets. It is permanent capital with no fixed dividend or repayment date. Liability of the holder is limited to the unpaid amount on the shares.

What are the main sources of equity funding?

Public sources are an IPO, a further public offer and a rights issue. Private sources are private placement, preferential allotment, QIP, ESOPs and investment by venture capital, private equity or angel investors. Retained earnings also build equity internally.

What is a rights issue under the Companies Act, 2013?

It is an offer of further shares to existing equity holders in proportion to their paid-up capital under section 62(1)(a). The offer stays open for the period set by the section and can be renounced unless the articles say otherwise.

When is a special resolution needed to issue further shares?

A special resolution is needed for an issue to employees under an ESOP scheme and for an issue to any persons under section 62(1)(c). For the latter, the price must also be set by a registered valuer's report.

Can a producer company issue preference shares?

No. Section 378ZB says the share capital of a producer company consists of equity shares only. Member shareholding should, as far as may be, be in proportion to patronage.