Provisions of Section 2(68) of the Companies Act, 2013 Prohibit any invitation to the public to subscribe to any securities of the company. From the definition above a private company cannot raise the funds from the public and finds limited sources to infuse funds to run its Inbusiness.thisarticle
The bank is one of the most important resources for taking financial support. A Company can easily take a term loan and a working capital loan from banks or other financial institutions against the security of its assets, moveable and immovable properties. This option is preferred when the funds from promoters are not sufficient to sponsor business operations. However, these funds are raised with the cost of fixed interest at the interval of a pre decided long term types finance that a company can avail from a bank are as follows:
BANK LOANS
we are listing sources of funding in the form of Debt for Private Limited Companies: DEBT FUNDING Debt means money borrowed from lenders by the company and it pays the interest on that investment. Companies are required to repay the money with interest over time. Debt includes debentures, loans, borrowing, etc. Given below are the various form of Debt Funding.
of
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• Term Loan • Working Capital Loan • Bank Guarantee • Letter of Credit • Bridge finance • Cash credit • Bank overdraft • Purchase or Discounting of Bills • Invoice factoring • Trade credit/Buyers Credit • Packing Credit in foreign currency
Capital is the key factor to expand the horizon of services and resources and sustainable growth of any business. And lack of funding to suffice the operational requirements becomes the reason for business failure. But pitching for investments and getting a deal is not a piece of cake. Company owners in Private Limited Company find limited sources to infuse funds for the projects and operations of the company.
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Fund Raising Avenues for Private Companies in India Series 1
• If the loan is brought in due to the condition imposed by a bank or any lending institution for promoters to bring in funds by way of a loan;
A company must create a charge on its assets in favour of the banks from which they avail secured loan or other financing facilities by way of pledge, hypothecation, or mortgage and file requisite forms with ROC.
• Amount of deposit to be accepted doesn’t exceed 100% of the aggregate of paid up share capital, free reserves, and securities premium account. Files returns of such accepted deposits with ROC in form DPT 3.
A Private Company may accept deposits from its members after obtaining the approval of the members in General Meeting through Ordinary Resolution and subject to fulfilling the following conditions:
• No deposits which are repayable on demand shall be accepted or renewed.
Fund Raising Avenues for Private Companies in India Series 1
• Loan is provided either by promoters themselves or by their relatives or by both; and
• No deposits which are repayable on notice within a period of 6 months or more than 36 months shall be accepted or renewed.
• This loan shall subsist only till there is an outstanding loan from such bank or lending institution and needs to be repaid after the bank or financial institution loan has been repaid.
UNSECURED LOAN FROM DIRECTOR AND HIS RELATIVES
• A company may accept deposits repayable earlier than 6 months but not earlier than 3 months, to meet its short term fund requirements provided that such deposits don’t exceed 10% of the paid up share capital, free reserves, and securities premium account of the company.
Inter Corporate Deposit means any deposit or loan received by one company from another company. Inter Corporate deposits are not considered as deposits under the Companies Act, 2013 and therefore a private limited company can accept a loan from any other company and it would not be considered as a deposit. Section 186 of the Companies Act, 2013 does not apply
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A company can accept unsecured loans from a director and their relatives with or without interest. For a private company, there is no limit on the amount that can be borrowed by a company from its directors or their relatives. However, at the time of giving the loan to the company, the director is required to submit a declaration to the company that the amount of loan given by him is from his own funds and is not being given out from the funds borrowed by him by way of loan or deposit from others. The company is required to mention in its Board’s report the amount of unsecured loan taken from a director and his relatives.
The Promoters of a company can also provide an unsecured loan to the company if it fulfills three conditions:
INTER-CORPORATE DEPOSIT
DEPOSIT
PLEDGE OF SHARES
Any amount received from the Central Government or a State Government, or local authority, or any amount received from a statutory authority constituted under an Act of parliament or a state legislature or Any amount received from foreign Governments, foreign/ international banks, multilateral financial institutions (including, but not limited to, International Finance Corporation, Asian Development Bank, Commonwealth Development Corporation and International Bank for Industrial and Financial Reconstruction), foreign government owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign body Corporates and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 and rules and regulations made there under.
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A Pledge of shares means availing a loan against the shares held by a person or entity.
LOAN FROM GOVERNMENT ENTITIES
2. In the case of a Secured Loan, the Company is required to execute the Security Creation Documents such as Deed of Hypothecation or Deed of Mortgage or Deed of Guarantee, etc., and need to pay stamp duty on the same.
to any loan or guarantee given by a company to its wholly owned subsidiary or joint venture company.
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Compliances to be followed by Borrower:
Fund Raising Avenues for Private Companies in India Series 1
1. Being a Private Company, provisions of Section 180 (1) (a) and 180 (1) (c) i.e. Restrictions on Powers of Board relating to borrow money or to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings are exempt to the Private Companies, hence Private Companies are not required to obtain prior approval of shareholders by way of Special Resolution and Board of Directors in their meeting can take the approval for the same.
LOAN FROM EMPLOYEES OF THE COMPANY
As per sub clause (x) if clause (c) of rule 1 of the Companies (Acceptance of Deposits) Rules, 2014, the Deposit doesn’t include any amount received from any employee of the Company.
3. Company is required to file Form CHG 1 or CHG 9, within 30 days from the date of the Creation of Security.
Promoters of a company can pledge shares of their own company or pledge shares of other listed companies with banks or financial institutions as “collateral” for availing loan from such bank or financial institutions to meet the funding requirements of the company.
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Fund Raising Avenues for Private Companies in India Series 1
DEBENTURES
Compliances to be followed by Lender:
1. As per Section 186 of the Companies Act 2013, where the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate along with the investment, loan, guarantee, or security proposed to be made or given by the Board, exceeding sixty percent of its paid-up share capital, free reserves, and securities premium account or one hundred percent of its free reserves and securities premium account, whichever is more, no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorized by a special resolution passed in a general meeting. Hence if it is below the limit as specified above, then it can be done through Board Approval in their meeting.
Section 43 of the Companies Act, 2013 defines “Preference shares” as that part of the issued share capital of a company that carries or would carry preferential rights with regard to:
EQUITY SHARES
As per Section 71 of the Companies Act, 2013, a private limited company can issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption. Provided that the issue of debentures with an option to convert such debentures into shares shall be approved by a special resolution passed by the shareholders in a duly convened general meeting of the company. A company can issue secured and unsecured debentures. Secured debentures may be issued by a company subject to such terms and conditions as may be prescribed. Further Company cannot issue any kind of debentures carrying any voting rights.
Section 2(30) of the Companies Act, 2013 defines ‘Debentures’ as securities that include debenture stock, bonds, or any other instrument of a company that evidences a debt of the company whether constituting a charge on its assets or not.
Equity shareholders are members of the company and they are the beneficial owners of the company as they invest their hard earned funds in the company with almost no or low return. The Promoters of a company can infuse finance into the company by investing in equity shares of the company at the time of incorporation of the company and at any other time when equity shares are issued by the company either through private placement, or rights issue, or preferential allotment of shares. A private company can also issue shares on a private placement basis or preferential allotment basis to people other than promoters.
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PREFERENCE SHARES
• Payment of dividend either at a fixed amount or an amount calculated at a fixed rate, and • Repayment of share capital in the event of winding up of the company.
Fund Raising Avenues for Private Companies in India Series 1
RIGHT ISSUE
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Preference shares can be issued at a pre determined dividend rate. Dividends paid on preference shares can be cumulative (interest is accumulated and paid on a specific date) or non cumulative (interest is not accumulated and paid yearly). Preference shares can be convertible i.e. it can be converted to equity shares on a specified date or non convertible. A preference share is a good tool to arrange finance for a company without parting with ownership rights of the company, unlike equity shares.
One of the methods to infuse capital in the Company is by way of ‘Right Issue’. ‘Right Issue’ can also be defined as the pre emptive right that an existing Equity Shareholder has in the Company in preference to an outsider. The allotment of shares by way of the right issue is governed by section 62(1)(a) of the Companies Act, 2013. In the case of a rights issue, shares are offered by the company to the people who on the date of the offer are existing equity shareholders of the company, and the shares offered are in proportion to their existing shareholding in the company. Shares include Equity Shares as well as Preference Shares, and since the provision says Shares are issued to existing equity shareholders of the company, the Private companies can issue any type of shares by way of Right Issue to the existing Equity Shareholders of the Company, however, Company cannot issue any other Securities other than shares by way of a Right Issue. Private Companies Issuing Preference Shares shall also need to comply with Section 55 of the Companies Act, 2013 and rule 9 of The Companies (Share Capital and Debentures) Rules, 2014. As per Section 62(1) of the Companies Act, 2013 any letter of offer for a rights issue should provide the members with the right to renounce the shares offered to him in favour of any other person and such other person does not necessarily have to be an existing shareholder of the company. In case, the existing shareholders are not willing to subscribe to the rights, he/she can transfer or sell such rights to outsiders. However, in the case of Renunciation, provisions of Income Tax relating to Capital Gains will become applicable on a case to case Asbasis.per the provisions of Section 62(1)(a), in the case of Right Issue of Shares, Private Company may after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis advantageous to the shareholders and the company.
PRIVATE PLACEMENT
Private companies having scarce funds or startups can issue sweat equity shares, as per Section 54 of the Companies Act, 2013, to its directors or employees for consideration other than cash in lieu of the services or the know how given by such employees or directors to the company. The issue of sweat equity shares is a win win situation both for the company and the Employees as the company would not have to part with major funds for availing value
For private placement of securities, the company should issue a private placement offer letter to select persons identified by the Board of the company, and those persons should submit the application form to the company and pay the application money either by cheque or demand draft or any other mode except through cash. The company is required to file necessary forms in this regard and also to keep the application money in a separate bank account which should not be utilized unless an allotment of shares is made, and the return of allotment is filed for the same.
SWEAT EQUITY SHARES
As per Section 42 of the Companies Act 2013, “Private Placement” means any offer of securities or invitation to subscribe or issue of securities to a select group of persons who have been identified by the Board of the company (other than by public offer) through private placement offer letter and which satisfies the conditions as stipulated in this section.
Preferential allotment of shares is made as per provisions of Section 62 (1)(c) and Rule 13 of Companies (Share Capital and Debentures) Rules 2014. “Preferential offer” means an issue of shares or other securities by a company to a select person or group of persons on a preferential basis. The preferential issue does not include shares issued by way of private placement, rights issue, bonus issue, employee stock option or the like.
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Fund Raising Avenues for Private Companies in India Series 1
The expression, "shares or other securities" means equity shares, fully convertible debentures, partly convertible debentures, or any other securities, which would be convertible into or exchanged with equity shares at a later date.
PREFERENTIALcompany.ALLOTMENT
The preferential allotment can be made for cash or consideration other than cash. A company can issue shares on a preferential basis to its promoters, other companies, venture capitalists, angel investors, etc. for raising funds as required by it.
This means if existing shareholders decline or they do not subscribe to the shares offered to them, then the Board of Directors may dispose of them in such a manner that is not disadvantageous to the shareholders and the
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In Private Placement, any security including Equity shares, Preference shares, Debentures, Bonds, or other marketable securities, whether convertible or not, can be issued.
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An employee stock option/ownership plan (ESOP) is a type of employee benefit plan which is intended to encourage employees to acquire stocks or ownership in the company.
ESOPs can benefit the company along with the employees as it has been shown to improve the organizational performance of a company to a great extent. Increased organizational performance typically leads to a higher share price and therefore a higher balance in employee ESOP accounts. ESOP is in the form of Equity shares which implies that if an employee exercises his/her option, he/she will actually own part of the company and if the company does well the value of those shares will also rise
VENTURE CAPITAL
Angel investors are high net worth persons, who lend funds in exchange for the ownership stake in any company. Because they get an equity position in the company, angel investors provide substantial amounts of capital when they find the company where they wish to invest. Angel investors are mainly founder professionals in private equity; it any business wants funding, it must pitch its need for financing with current financial statements, a complete business plan, and a viable exit strategy.
Under these plans, the employer gives certain stocks of the company to the employee for negligible or lesser costs which remain in the ESOP trust fund, until the options vest and the employee exercises them, or the employee leaves/retires from the company or institution.
FRIENDS AND FAMILY
Fund Raising Avenues for Private Companies in India Series 1
Initially, personal resources are used to finance business operations in a private limited company. Once financing from personal savings dries up, owners may get financial support from their friends and family members. Here the plus point is that friends and family who invest in the business do not take an active role in operations.
EMPLOYEE STOCK OPTIONAL PLAN (“ESOP”)
ANGLE INVESTOR
Venture capitalists invest in business during the startup stage. If they believe the business will be profitable, the venture capitalist invests money in exchange for equity in the form of company shares. And, when the company makes money, the venture capitalist also earns profits.
added services or know how and the employees would be inclined to work austerely for a company in which they have a stake.
ESOPs are an incentive tool gaining popularity in India, especially in companies that cannot offer high grade salaries to their employees and simultaneously want the employees to work with a sense of ownership in the Company. ESOPs help motivate the employees and encourage them to contribute to the growth and profitability of the Company.
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AMCs or Insurance Companies then create a debt instrument and sell it to the investor as a Pass Through Certificate that delivers fixed income to the investor.
Financial institutions like banks, asset management companies, and insurance companies typically issue such certificates. Such institutions provide a large number of mortgages to their customers. These mortgages are pooled together in a large investment and sold to other financial institutions like Asset Management Companies or Insurance companies.
Commercial paper, or CP, is a short term debt instrument issued by companies to raise funds generally for a time period of up to one year. It is an unsecured money market instrument issued in the form of a promissory note and was introduced in India in 1990. Corporates that enjoy a high rating can diversify their sources of short term borrowings using CPs.
To understand Pass Through Certificates better, you need to understand the concept of BanksSecuritization.provide a wide range of loans, including home loans, commercial loans, and auto loans. These loans result in income or receivables for the lending institutions.
Fund Raising Avenues for Private Companies in India Series 1 COMMERCIAL PAPER
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Also, since CPs are not securities, provisions relating to the Private Placement of securities (Section 42 of Companies Act, 2013) would not apply to the issue of CPs.
A Pass Through Certificate is a financial instrument that permits the holder of the certificate or investor to earn a fixed income from the proceeds of the certificate. It is issued to the investor against the asset or mortgage backed securities that have been pooled together in a single securitized loan package, which the issuer holds.
When an investor purchases these debt instruments, they are given a Pass Through Certificate by the Special Purpose Vehicle.
Securitization is the process of converting these receivables or incomes into debt instruments that are then sold to individual investors. A Special Purpose Vehicle is set up to issue these debt instruments to the investors.
PASS THROUGH CERTIFICATE
The Companies Act does not specifically provide for CPs. Further, no definition for CPs exists under Company law. Thus, they would be treated like any other borrowings and would consequently trigger Section 179 and 180 for borrowing through CPs.
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Fund Raising Avenues for Private Companies in India Series 1
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Disclaimer: This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This article cannot be relied upon to cover the specific situation and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Affluence Advisory Private Limited to discuss these matters in the context of your circumstances.