Rights Issue does not fall under the definition of Private Placement under the Companies Act, 2013. They are two distinct and mutually exclusive methods of issuing fresh share capital, governed by different sections and compliance requirements.
Here is a detailed explanation of the differences:
Rights Issue vs. Private Placement: A Legal Distinction
The two methods are distinct regulatory frameworks for issuing fresh share capital, governed by separate sections of the Companies Act, 2013.
| Feature | Rights Issue (Section 62(1)(a)) | Private Placement (Section 42) |
| Legal Basis | Section 62: Governs the preferential offer of shares to existing members. | Section 42: Governs the offer of securities to a select group of identified persons. |
| Recipient/Audience | All existing equity shareholders of the company, strictly pro-rata to their existing shareholding. | A select group of Identified Persons, limited to 200 in a financial year (excluding QIBs and employees under ESOS). |
| Shareholder Approval | Requires a Board Resolution. Shareholders have a statutory right to the shares. | Requires a Special Resolution (75% majority) from the shareholders before the offer can be made. |
| Principle | Pre-emption Right: Preserves the existing shareholders' ownership percentage (anti-dilution mechanism). | Targeted Funding: Allows the company to select strategic, external, or financial investors. |
| Valuation Requirement | Relaxed/Optional: The issue price is generally determined by the Board and does not require a mandatory valuation report from a Registered Valuer under Section 42/Rule 13. | Mandatory Valuation: Requires a Valuation Report from a Registered Valuer to ensure the offer price is at Fair Market Value (FMV). |
| Offer Document | Letter of Offer. | Private Placement Offer Letter (Form PAS-4). |
The Legal Exclusion
The separation of these two methods is confirmed by the definition of "preferential offer," which is the mechanism used for Private Placement.
Section 62(1)(c): This clause governs the issuance of shares to any person other than existing employees (ESOP) and existing shareholders (Rights Issue). This means that any issuance other than a Rights Issue or ESOP is typically considered a preferential offer subject to the rules of private placement (Section 42).
Crucial Takeaway for Compliance:
"Rights Issue is the easiest and fastest way to raise capital from existing shareholders because it only requires a Board Resolution and is exempt from the stringent Special Resolution and mandatory valuation requirements (unlike Private Placement). A company should opt for Private Placement only when it needs capital from external investors who are not currently on the register of members."