The real hurdle to avail funding in a private company is that it restricts onboarding public investors. While finance is surely the bloodline for any business to prosper, it is important how to navigate a few options for raising funds. Read on to know the ways to avail such funding and mandates that are required to follow.
First, know the Governing Act and Rules
The Companies Rules, 2014 explains what the term ‘deposit’ stands for along with listing a few exempted deposits which are received from the following:
State or Central Government.
Directors or their relatives.
Foreign Governments or banks subject to FEMA provisions.
Any banking company or Public Financial Institutions.
Funding options available for a Company
A. Internal Funding: Involves additionally issued share capital, directors and members’ deposits, etc.
B. External Funding: Finance from the bank(s), angel investors, venture capitalists, etc.
Let us now analyse both the above options and its repercussions on choosing it.
1. Internal funding options analysis
1. An additional issue of share capital
Issuing additional share capital is one of the most suitable options to shore up the subscribed capital in a private company. This results in the increase of company’s finances while incentivizing its shareholders. To raise such share capital will require the Company to follow the norms appearing in sec.62 of the Companies Act.
Deposits from Directors and Relatives of Directors
When accepting the deposits from Directors and Relatives of the Directors the following condition must be met:
The directors and their relatives need to present a written declaration stating that the given funding amount is not acquired by accepting loans, borrowing or any third-party deposits. Also, the company must provide such received funding details in the Board’s report.
Deposits from its employee:
The company can receive deposits internally from its employees. A maximum of employee’s annual salary is a permissible amount for receiving employee’s deposits.
Companies can also accept the funding as deposits from members provided it abides by the following:
Mandatorily issue a circular for members which includes:
Company’s financial position reflected in a statement
Company’s credit rating
Number of depositors
Prior deposits received and the amount.
Submitting such circular to Registrar within 30 days before issuing it.
Before 30th April, the following deposits are required from the company;
A sum amount not less than 20% of such deposited amount that is expected to mature in the next financial year.
Keeping the same in a different bank account (of a scheduled bank) which is referred to as deposit repayment reserve account.
Certifying that company is free from having committed any payment defaults or over the accepted deposits.
As per the notification released on 13/06/2017, the following private companies are exempted from following the above conditions:
Companies having accepted the loan amount from its members should not go over 100% of its sum of paid-up up capital along with securities premium account and free reserves.
Any Company registered as a start-up (5 years from its incorporation date).
And any Company that satisfies the following circumstances;
Not a subsidiary or associate of any other existing company.
Company’s borrowing from financial institutions like bank or body corporate is lower than Rs.50 Crore or twice of its paid-up capital.
No default in repayment of current borrowings.
2. Analysing external funding options
A. Banking and financial institution’s Loans
Companies would usually prefer banks and other financial institutions for external funding options. Banks and other funding institutions consider the reputation of founders and promoters before issuing such loans which anyway comes with fixed interest.
B. Private Placement of Shares
A company can raise funds by offering shares to a certain group of people. The Company’s Act makes this possible through Prospectus and Allotment of Securities Rules dealing with shares’ private placement. Note that it only involves inviting the ‘identified person’ by the company and it cannot be more than 50 people. Also, it does not include qualified institutional employees and buyers who are already availing the employee’s stock option.
There cannot be more than 200 people (aggregated) in a single financial year who are offered with the private placement.
C. Angel Investors and Venture Capital
Again, these two are the other options that a private company has to raise funds from. Angel investment comes from either an individual or group of individuals while venture capital comes from a company that holds a high net worth that chooses to lend funds in exchange for the company’s ownership stake.
Everything boils down to how the director(s) want to avail the funding and through which sources after thoroughly considering all the options mentioned above. Each of the options has its repercussions and mandates to be followed. Taking expert advice is highly recommended before taking any funding decisions. There may be instances where you are looking to increase the authorized share capital of the company as well, in such cases, the required documents must be in place before moving further.
DISCLAIMER : Views expressed above are the author’s own.