One simple way to raise equity capital is by way of doing a rights issue of shares.

'Rights Issue' means offering shares to existing members in proportion to their existing share holding.

Does this mean one cannot use this mechanism to raise capital from persons who are not shareholders of the company today?

No. The existing shareholders may renounce their rights (pass on their rights) in favour of other persons. If the existing shareholders do not subscribe nor do they renounce their rights in favour of anyone, then the Board has the powers to dispose of the un-subscribed shares in any manner they think is most beneficial to the company.

Advantages of Right Issue

Compared to other modes of raising capital (like preferential allotment or private placement), the Right Issue approach has distinct advantages.

1. Issue of prospectus is not required for rights issue of shares or debentures to existing members or debenture holders, even if the applicant has right to renounce the shares.
2. No need to obtain a valuation report for filing with the Registrar of Companies.
3. Private companies may issue the shares quickly through the rights issue route.