CAN THE BOARD HAVE

THE POWER TO DISPOSE OF THE UNSUBSCRIBED PORTION OF SHARES

IN A RIGHTS ISSUE? IF YES, DOES SUCH AN ACT REQUIRE THE CONSENT OF THE EXISTING
SHAREHOLDERS?

Section 62 of the Companies Act, 2103 deals with further issue of share capital. This Section
provides for the right of pre-emption to existing shareholders. This essentially allows them to be
able to preserve the value of their shareholding, as well as their control over the company by
making sure that any issue of shares is made first to the existing shareholder, in proportion to
their shareholding in the company. In addition, the provisions of Rule 13(1) of the Companies
(Share Capital and Debenture) Rules, 2014 will also be read with Section 62(1)( c) here as it
deals with issue of shares on a preferential basis.
Existing shareholders have the right to be offered first any subscription to additional capital in
the company. The letter of offer for such a rights issue shall specify the number of shares offered
and other information and limiting a time not being less that fifteen days and not exceeding thirty
days from the date of the offer within which the offer, if not accepted nor renounced, shall be
deemed to have been declined. And in the case where the existing shareholders do not accept the
offer, or renounce such an offer, the directors will have to dispose of such shares in a manner not
disadvantageous to the shareholder and the company.1
In addition, Section 62 is a mandatory provision and not a compliance provision as it deals with
the nature of shareholders rights. Therefore, any breach of the Section will be illegal and liable to
be quashed. Other remedies such as suing for oppression and mismanagement, rectification of
register of members, etc., can be availed of by the opposite party if there is such a violation.
In the current scenario, the shares were issued to the existing shareholders as a rights issue as
explained above and was not issued to persons apart from the existing shareholders. However,
persons other than the existing shareholders have shown interest in subscribing to the
unsubscribed portion of the said rights issue and therefore by way of Section 62(1)( c), the Board
can be held to have the power to dispose of the shares in the manner prescribed above and as the
company has offered the shares of the rights issue in favor of the existing shareholders before

1 Section 62(1)(a), COMPANIES ACT, 2013.

allotment in favor of the persons other than the existing shareholders who have shown interest,
the consent of the existing shareholders is also not required.
In V. Shanmugasundaram v. Emerald Automobiles Ltd, (2001) 103 Comp Cas 1108 (CLB), the
facts of the case were that the petitioner contended that the allotment of the impugned shares in
favor of the respondent and his associates was in violation of Section 81(1)(a) of the 1956 Act,
and contended by the respondents that there has been no infirmity whatsoever in allotment of the
impugned shares. According to the respondents, the company has offered the rights shares in
favor of the existing members before allotment in favor of the third respondent and his
associates, in which case, consent of the shareholders, as contended by the petitioner is not
required.
The court dealt with Section 81, Companies Act, 1956 the corresponding provision to Section 62,
Companies Act, 2013. But the difference was that in this case since the remaining members had
not accepted the offer, the managing director was empowered to approach the members of the
public on a private placement basis and obtain necessary applications. And hence held that,
notwithstanding the above, if the company at a general meeting passes (i) a special resolution
authorizing the board to allot shares to outsiders or (ii) an ordinary resolution to that effect is
passed and the Central Government's approval is obtained, the board may allot the shares to the
outsiders and that such allotment was not invalid.