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Sources of funding in Private Limited Company
What comes first when you listen the word company? When we give a thought about company, immediately two types of companies strikes off in our minds-
A.Private Company:
Private Company means a company which by its articles of association restricts the right of members to transfer its shares. Limits the number of its members to fifty. A private company can have maximum of 50 members.
B.Public Company:
The public company refers to a company that is listed on a recognized stock exchange and its securities are traded publicly. There is no ceiling on maximum number of members in case of public company.
Whether it is Private Company or Public Company, finance is the backbone for any form of company. Without essential finance, it is not possible to grow and flourish.
Owing to the COVID-19 Pandemic, in 2020, many companies like Paytm, OYO, Zomato, Swiggy to Dunzo, startups is facing quite tough time to manage its losses. Thus in such cases, a question of-
- Raising funds
- Sources of raising funds
Companies Act 2013 & Rules governing Sources of Funds
Exited to know more about-
- What are the governing sections and rules for various sources of funds
- What are the various sources available for raising funds for Private Limited Companies
- What are the best options practiced today for raising funds by Private Limited Companies
Before moving further lets first understand the various sections and rules governing raising of funds by companies.
Section 73 of the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014
Section 73 of the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014 deals with the company’s funding segment.
Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014 covers the definition of the term ‘deposit’ and the same lists out the exempted deposits which are –
- Receiving any amount from the State or Central Government.
- Receiving any amount from any company.
- Receiving any amount from the directors or relatives of the directors.
- Receiving any amount from the foreign Governments or banks subject to provisions of FEMA.
- Receiving any amount from any banking company or Public Financial Institutions.
Section 179 (3) of the Companies Act, 2013 entails passing of the Board’s Resolution to borrow monies.
Types of sources of funding in Private Limited Company
Basically a private limited company can raise funds through-
1.Debt Funding:
When a Company borrows money from its lenders and pay the interest, it is simply termed as debt funding. Thus under debt funding, the company is under obligation to pay the interest along with the repayable amount at a specified period of time.
Recent Example: In 2020, Dunzo has raised $ 11 million to set of the massive huge losses.
2.Equity Funding
Equity financing is the process of raising funds through sale of shares. By selling shares, they sale ownership of there company in return for cash. The best example of equity financing is Initial Public Offering (IPO).
Recent Example: Madhav Copper IPO issued 25.50 Cr on 27th January, 2020. Lets discuss funding’s in detail. First lets have a look on Debt Funding.
I.Sources of Debt Funding by Private Limited Companies:
A Private Limited Company may raise funds through debt by following ways-
Loans and Borrowings:
Sec 179 (3), Section 2(31), Section 73, The Companies (Share Capital and Debenture) Rules, 2014, Company (Acceptance of Deposits) Rules 2014. deals with loans and borrowings.
1# Loan from Directors
A company can avail unsecured loans from directors and the same shall not be considered as deposits. The unsecured loans accepted by a private company from directors and shareholders are considered to be “exempted deposits” under the Companies (Acceptance of Deposits) Rules, 2014.
2# Loan from Shareholders
A Private limited company can accept upto 100% of-
- Aggregate of the paid up share capital and
- Free Reserves
If a company wants to accept deposits more than 100% of Aggregate of the paid up share capital and Free Reserves then it need to comply with Sec 73 of the Companies Act, 2013.
3# Loans from relatives of Directors
As per Companies (Acceptance of Deposit) second amendment rules, 2015 in rule 2, in sub-rule (1), clause (c), of sub-clause (viii) any amount receipt from a person, who at the time of acceptance was a relative of director of the Company, will not be considered as Deposit.
4# Loan from other Company
As per sub clause (vi) of clause (c) of rule 1 of the Companies (Acceptance of Deposits) Rules, 2014, deposits does not includes inter corporate loans i.e any amount received by Company from any other Company (Inter corporate Loans). It may be noted that LLP can’t give loan to Private Limited Company under this clause.
5# 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, Deposit doesn’t include any amount received from any employee of the Company.
6# Loan from Government Entities:
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.
7# Loan from Banks and Financial Institutions:
Any amount received from any banks I financial institutions or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government.
Checklist of firms or individual from whom companies are not allowed to borrow loans.
1# Loans from interested Directors
Any Private Limited Company of which there is such interested director where he holds more than 25% of share capital in any other company then the company cannot opt for loan from such other company.
Eg: Mr Rakesh is a director in ABC Private Limited and also he is a director in XYZ Private Limited holding 60% share capital in the company,that means he is an interesting director and thus ABC Pvt Ltd cannot opt for loan from XYZ Pvt Ltd.
2# Loans from HUF
Company can’t accept loan from a HUF even if its Karta is member /director of the Company. Because Company can accept loan only from person except Director/Member or Relative of the Director.
3# Loans from Partnership Firm
Company can’t accept loan from a Partnership firm even if its partners are member /director of the Company. Because Company can accept loan only from person except Director/Member or Relative of the Director.
II.Sources of Equity Funding by Private Limited Companies
1# Equity Shares
Issue of equity shares is the best form of Equity funding whereby a Company raises finance by issue of new shares through various allotment methods.
2# Preference Share
Sec 43 of the Companies Act, 2013 deals with issue of Preference shares and its procedures. Preference shares can be issued at pre-determined dividend rate. A preference share is a good tool to arrange finance for a company without parting with ownership rights of the company, unlike equity shares.
3# Rights issue of shares
Right issue of shares means whereby the company first offers issue of shares to its existing shareholders on proportionate basis.As per Section 62(1) of the Companies Act, 2013 any letter of offer for 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. The company can easily raise finance for any purpose through a rights issue of shares.
4# Private Placement
Private Placement means any offer of securities or invitation to subscribe or issue of securities to 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.
5# Sweat Equity Shares
Sweat Equity shares are also one of the most powerful tools for raising funds through Equity Funds. Sweat Equity shares means when company issues shares to the directors or employees in lieu of the services or the know-how given by such employees or directors to the company.
6# Debentures
Section 2(30) of the Companies Act, 2013 defines ‘Debentures’ as securities which include debenture stock, bonds or any other instrument of a company which evidences a debt of the company whether constituting a charge on its assets or not.
A company can issue debentures with an option to convert such debentures into shares either wholly or partly at the time of redemption of debentures. A company can issue both secured or unsecured debentures; however, no debentures shall have voting rights.
