Funding in a Private Limited Company: Sources & Mandates

When we talk about the company, there are only two categories that come to the mind – a public limited company and a private limited company. Talking about the private company, the definition of the same is covered under section 2(68) of the Companies Act. Briefly, the private company means a company which by its articles restricts any invitation to the public to subscribe for any securities of the company for the purpose of funding.

Whether it is a public company or a private company, finance is the key bloodstream of any form of business. Finance is the most important facet on which the existence and growth of any business depend.

The Companies Act 2013, governs all the forms of companies. The Act provides various funding modes through which the businesses opting for a Private Limited Company registration in India can raise finance. Some of the funding ways are being taken up in the present article.

Governing Act and Rules

Before going into the nitty-gritty of available funding modes for the Private Limited Company, let us understand the primary sections and rules attached to the same.

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.

Funding options available to the Private Limited Company

The Private Limited Company has two funding options –

• Internal funding options like an additional issue of share capital, deposits from the members, deposits from the directors etc.; and
• External funding options like bank finance, venture capital, angel investors etc.

Analyzing internal funding options in a Private Limited Company

An additional issue of share capital

A further issue of share capital is the most viable option to increase the subscribed capital. It results in a significant increase in the company’s finance and also incentivizes the shareholders of the company. For raising of the funds through the additional issue of share capital, the company is required to comply with the procedure laid down at section 62 of the Companies Act, 2013

Deposits from Directors and Relatives of the Directors

The company can quickly raise funds by accepting deposits from the directors and/or relatives* of the directors by fulfilling the below-mentioned conditions :

• The directors and/or the relatives* of the directors are required to give a declaration in writing that the amount is not carried out of the funds acquired by them by borrowing or accepting loans or deposits from others; and the details of the money received is to be provided by the company in the Board’s report.

*Relatives here can include the  following:

• Members of a Hindu Undivided Family;
• Spouse of Director;
• Father, including stepfather;
• Mother, including stepmother;
• Son, including stepson;
• Daughter, including stepdaughter;
• Son’s wife;
• Daughter’s husband;
• Brother, including stepbrother(s);
• Sister, including stepsister(s);

Deposits from its employee

Another easy internal funding option is accepting deposits from the employees. The company is permissible to receive the deposit from its employee maximum up to the employee’s annual salary.

Deposits from its members

Provisions of section 73 (2) of the Companies Act, 2013 allows the private company to raise funds by accepting deposits from its members. The private company is required to fulfil the following conditions :

• Company is required to issue a circular to its members. Circular should include the following :
  • A statement reflecting the financial position of the company;
  • The credit rating of the company;
  • The total number of depositors; and
  • The amount due to the previous deposits.
• Copy of the above circular is to be submitted to the Registrar within 30 days before the date of issue of such circular.

• The company is required to deposit, on or before 30^th April each year, a sum not less than 20% of the amount of deposits maturing during the following financial year and kept in a scheduled bank in a separate bank account to be called as deposit repayment reserve account.

• Certifying that the company has not committed any default in repayment of deposits accepted or in payment of interest on such deposits.

The above referred conditions do not apply to the following private companies [notification dated 13^th June 2017].

• When the amount of loan accepted by the company from its members doesn’t exceed 100% of the total of its paid-up capital and Free Reserves and Securities Premium account.
• The Private Limited Company which is a start-up for 5 years from the date of its incorporation.
• The Private Limited Company which fulfils the following conditions –
  • The company should not be an associate or a subsidiary of any other company.
  • The borrowing of the company from banks or the financial institution or any other body corporate is lower of –
    • Twice of its paid-up capital; or
    • INR 50 Crore.
  • Company has not defaulted in the repayment of the existing borrowings.

Briefly analyzing external funding options

A loan from Banks and other financial institutions

One of the firstly and mostly preferred external funding options is the raising of funds from Banks and/or other financial institutions.

Based on the reputation of the directors/promoters and company, obtaining funds in the form of loan from banks and/or other financial institutions is quite easy. However, the said loan accompanies a fixed interest cost.

Private Placement of Shares

The private company can raise funds by offering its shares to a selected group of persons. Section 42 of the Companies Act, 2013 and rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 deals with the private placement of shares.

Points to be taken care of

• The company is mandatorily required to obtain previous approval from the shareholders for the private placement offers by passing the resolution.

The private placement offer can be made only to an ‘identified person’. Such offers cannot be more than 50 or such higher numbers as may be prescribed.

Qualified institutional buyers and employees of the company that are being offered securities under a scheme of employee’s stock option cannot be included

• The private placement offer cannot be made to more than 200 persons in aggregate in a financial year.
• Whenever a company makes any allotment of securities under this section, it shall file with the Registrar a return of allotment in such manner as may be prescribed, including the complete list of all security-holders, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed.

Angel Investors and Venture Capital

Angel investors and venture capital are some of the other external funding options available to the private limited company.

The angel investors are individuals (or group of individuals) and on the other hand Venture capital is a company holding high net worth and likely to lend funds in exchange of ownership stake in the company.

Summary of Sources from whom funds can be borrowed

• Directors
• Relatives of Directors
• Promoters
• Members, subject to compliance with section 73 and other applicable provisions of Companies Act, 2013
• Banks or any other financial institutions including foreign banks or financial institutions
• From other body corporates
• State and Central Government, etc.
• Employees – The amount borrowed should not exceed the Employees’ annual salary