How Can a Private Limited Company Raise Funds?

The financial system of a firm is its lifeblood. It is the most important component that influences the survival and expansion of a firm. A public limited company can easily collect money by offering stocks to the public without restrictions, but a private company finds it more challenging to do so because public invites are not allowed and the maximum number of members is 200. We will focus on the numerous methods a private limited business might use to raise capital in this post.

Top Types of Funding Options Available to Private Companies
 

Through The Issuance of Additional Capital
 

• Rights Issue

• ESOP
• Private Placement

Through Loans and Debentures
 

Through Angel Investors
 

High-net-worth individuals who lend money to startups in exchange for stock in the company are known as angel investors. Since the majority of angel investors are private equity specialists, a company looking for funding must have current financial documents, a successful business plan, and a workable exit strategy. Angel investors often only work with businesses that have a strong likelihood of experiencing exponential growth and that want to go public in the near future.

Equity Shares
 

Since they spend their hard-earned money in the business with little to no return, equity shareholders are both members of the company and its beneficial owners. When a company is incorporated and at any other time when equity shares are issued by the company through a private placement, rights issue, or preferential allotment of shares, the promoters of the company have the option of investing in equity shares of the company. A private firm may also issue shares to anyone other than the promoters through a private placement or preferential allocation.

Preference Shares
 

"Preference shares" are defined as that portion of a company's issued share capital that carries or would carry prefered rights with relation to:

• Dividend payments that are either fixed in amount or computed at a fixed rate, and
• In the event that the firm is dissolved, the share capital must be repaid.

At a pre-established dividend rate, preference shares may be issued. Preference share dividends are either cumulative (interest builds up and is paid on a certain date) or non-cumulative (interest is not accumulated and is paid yearly). Preference shares may be non-convertible or convertible, meaning they may be converted into equity shares at a specific period. In contrast to equity shares, preference shares are a useful way to secure financing for a business without giving up any ownership interests in it.

Rights issue of shares
 

When shares are issued under a rights issue, the firm offers them to individuals who are already equity shareholders of the company as of the offer date in proportion to their current ownership of the company. Any letter of offer for a rights issue must, in accordance with Section 62(1) of the Companies Act of 2013, give the member the option to renounce the shares offered to him/ her in favour of any other person, who need not be a current shareholder of the company. Through the easy-to-use rights issue of shares, the corporation can easily raise capital for any purpose.

Private Placement of securities
 

According to Section 42 of the Companies Act of 2013, a "Private Placement" is any offer of securities, invitation to subscribe for securities or issuance of securities to a select group of people who have been identified by the Board of the company through a private placement offer letter and which complies with the requirements as outlined in this section (other than by public offer).

In order to make a private placement of securities, the company must send a private placement offer letter to a select group of individuals determined by the board of the company. These individuals must then submit an application form to the company and make the required application fee payments via demand draught, check, or any other method other than cash. The company must submit the relevant paperwork in this case and maintain the application funds in a separate bank account that cannot be used until shares have been allotted and a return of allotment has been submitted.

Preferential Allotment
 

According to Section 62(1)(c) and Rule 13 of the 2014 Companies (Share Capital and Debentures) Rules, preferential shares are allocated. A "preferential offer" is when a corporation issues shares or other securities to a particular or single person or group of people with preferential treatment. Shares issued by a private placement, a rights issue, a bonus issue, an employee stock option, or other similar mechanisms are not included in the preferential issue.

A preferential basis may be used to issue equity shares, fully convertible debentures, partially convertible debentures, and any other securities convertible into equity shares at a later time. The preferential allocation may be made in exchange for money or for something else. In order to raise the money it needs, a firm may issue prefered shares to its promoters, other businesses, venture capitalists, angel investors, etc.

Sweat Equity Shares
 

According to Section 54 of The Companies Act, 2013, private businesses with limited resources or startups may grant sweat equity shares to their directors or employees as payment other than cash in exchange for the services or expertise they have provided to the business. The issuance of sweat equity shares is a win-win situation for the company and the employees because neither party would have to fork over significant sums of money in order to obtain value-added services or know-how and because employees are more likely to work independently for a company in which they own stock.

Debentures
 

Debentures are securities, such as debenture stock, bonds, or any other instrument of a corporation that evidences a debt of the firm, whether or not it constitutes a charge on its assets, according to Section 2(30) of the Companies Act, 2013.

A business may issue bonds with the option to convert them into shares at the time of redemption, either whole or partially. A business may issue both secured and unsecured debentures, but none of them may have voting privileges. Secured debt obligations may be issued if the following requirements are met:

• Debenture redemption dates shouldn't be more than ten years from the original issue date.
   
• On its premises or assets, the corporation must establish a charge that is sufficient to cover the number of debentures that are due and the interest thereon.
   
• Before the issuance of the prospectus or letter of offer for the subscription of debentures but no later than 60 days following the allotment of the debentures, a debenture trustee should be appointed.
   
• Create a debenture trust deed to safeguard the debenture holders' interests.
   
• For the purpose of redeeming debentures, the corporation should establish a debenture redemption reserve.

Debentures are a great way to raise money through debt, but when it comes to convertible debentures, the private company needs to make sure that there are never more than 200 holders.

Unsecured Loan from Director and his Relatives
 

A firm may take interest-bearing or interest-free unsecured loans from a director and their family members. The amount that a private corporation may borrow from its directors or their family members is unrestricted. However, the director must submit a certification to the firm stating that the funds used to support the loan are his own and not money that he has borrowed as a loan or deposit from others when making the loan to the company. The amount of an unsecured loan accepted from a director and his relatives must be disclosed by the company in the board's report.

If a company meets three requirements, its promoters may also offer it an unsecured loan:

• If the loan is obtained because a bank or other lending institution required promoters to obtain loans in order to raise money;
   
• Promoters themselves, their families, or both may issue loans; and
   
• This loan must be returned after the bank loan or financial institution loan has been paid off and will only be valid as long as there is an outstanding loan from that bank or lending institution.

Inter-Corporate Deposit
 

Any loan or deposit obtained by one corporation from another is referred to as an inter-corporate deposit. A private limited business can receive a loan from any other company because inter-Corporate deposits are not regarded as deposits under the 2013 Companies Act. As a result, the loan would not be regarded as a deposit. Any loan or guarantee made by a firm to its fully owned subsidiary or joint venture company is exempt from Section 186 of the 2013 Companies Act.

A Private limited company cannot accept or ask for a loan from a company if:

• A director of the lending company is a member or director of the private corporation;
   
• The director of the lending company, either alone or jointly with another director or directors, controls or exercises at least 25% of the voting rights of the firm;
   
• It is standard practice for the Manager, Managing Director, or Board of Directors of the Company to carry out the instructions of the Director or Directors, or the Board, of the Lending Company.

A loan from a private corporation is exempt from the aforementioned restrictions as long as the following requirements are met:

• No corporation may own stock in the lending company;
   
• Less than twice the lending company's paid-up capital or Rs. 50 crores, whichever is less, is borrowed from a bank or other corporate or financial organisation;
   
• The lending corporation had not yet defaulted on the repayment of such borrowings at the time the loan was granted.

Deposit from Members
 

The term "deposit" is defined as any funds received by a company as a loan, deposit, or in any other form, but it excludes sums that are specified by the Reserve Bank of India. This definition is found in Section 2(31) of the Companies Act, 2013.

A private limited company may only take deposits from its members, as stated in Section 73 of the Companies Act of 2013, in order to protect investors. A private firm that meets either of the following requirements is exempt from the application of Section 73(2)(a) to (e)

• If the loan it accepts from its members isn't greater than its paid-up capital, free reserves, and securities premium account
• If the business is a start-up, up to five years from the date of formation;
• Which complies with the following three conditions
• The business that is not a subsidiary or associate of another business
• This company borrows money from banks, financial institutions, or other corporations for a sum that is less than twice its paid-up share capital, or 50 crores rupees, whichever is less.
   
• When accepting the deposit, such a corporation had not yet missed a payment.

As long as any private corporation accepting a deposit in accordance with clauses I through (iii) notifies the Registrar of the acceptance of the deposit from its members.

Commercial Paper
 

A short-term money market product known as the commercial paper is issued in the form of promissory notes. Primary dealers, all-Indian financial organisations, and corporations can all issue commercial papers.

• A business is qualified to issue commercial paper if it meets the following requirements:
   
• According to the company's most recent balance sheet, its tangible nett worth should not be less than Rs. 4 crores.
   
• The company's borrowed account should have been categorised as a Standard Asset by the banks and financing institutions.

As required by the Reserve Bank of India, the company issuing the commercial paper must have a credit rating of A-2 from one of the rating agencies. Commercial papers can be issued with maturities ranging from seven days to one year. These documents may be printed in denominations up to and including Rs. 5 lakhs. The business must choose a scheduled bank as its issuing and paying agent for the issuance of commercial papers.

Investments in commercial papers can be made by individuals, non-resident individuals (NRIs), financial institutions, unincorporated bodies, other corporate entities registered or incorporated in India, foreign institutional investors, etc.

Conclusion