Starting any kind of business requires an investment of capital whether it be long term capital or short term capital. Also there are different forms of raising capital in Private limited Company. Whenever a company has to raise further capital there may be different ways of raising. Majorly it can be divided under two heads – Debt and Equity. Both have their own pros and cons. A company can decide depending upon its priorities and what method suits its organization and the debt equity mix it intends to keep. There is a third kind which is hybrid and contains features of both - Debt and shares.

Debt financing includes Loans, Bonds and Debentures. This includes a fix pay off from the profits of the company as interest and therefore company’s budgeted cash flow and profits should be able to match the projected cash outflows that may arouse out of Debt financing. Also non payment of such interests would invoke various provisions of Companies Act or other laws under which it may face other challenges and non compliances. It also decreases a company’s Net worth. 

Equity capital may be raised from existing shareholders, from public, from institutional investors or from employees through Employee stock option plans ESOPs. 

Financing cost is also a major factor while deciding on the method of raising capital. The company may have to budget the cost of raising capital from diffirent methods and do a comparative analysis and choose method which matches its cash flow position.

Classification of Share Capital

Shareholders are the owners. They have the right to participate in major decisions of the company from Appointment of Directors, Auditors to raising of further capital. Though they enjoy high rate of dividends when the company makes enough profits but are also risk bearers and may therefore get nothing when the company is in loss.These are:

•Equity share capital: The shareholders who invest in equity capital are the owners of the company. They receive dividend if the same is declared by the company and there are enough profits. They possess voting rights in matters relating to the company. They are the last ones to get repayment of capital on winding up.

•Preference share capital: As the name suggests, preference shares are issued with preferencial right over other equity shareholders for payment of fixed percentage of dividend before any dividend is paid to other classes of shareholders. Also they have right to claim repayment of capital on winding up before equity shareholders.

Procedure to Issue shares and debentures (securities)

Procedure of issuing shares varies depending upon the type of issue such as bonus issue, right issue, private placement and public issue. When we talk about a private company, the most general way adopted is to issue shares through private placement. Section 42 of the Companies Act, 2013 along with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 govern issue of securities through Private placement. “Securities include shares, scrips, stocks, bonds, debentures, debenture stock, or other marketable securities of a like nature in or of any incorporated company or other entity corporate, according to the Securities Contracts (Regulation) Act, 1956”. Thus the process of issuing debentures by a private company is as same as issuing shares.

1.Selecting group of persons

It starts with deciding the group of persons to whom company want to issue securities. Their number shall not exceed 200 in a financial year which excludes any offer or invitation made to qualified institutional buyers, or to employees of the company under a scheme of employees stock option.

2.Conduct Board Meeting to pass following Resolutions:

1. To approve issue of securities along with issue price and no. of securities to be issuedvand rate of interest in case of debentures.
2. To approve the list of identified persons.
3. To approve draft offer cum Application letter which shall be in the Form PAS-4 (it shall be addressed specifically to the person to whom offer is made).
4. To call an Extraordinary General Meeting

3.Conduct Extraordinary General Meeting (EGM)

Pass Special resolution the EGM approving Private placement and offer letter.

4.File Form MGT-14

Within 30 days of the EGM, file the Special Resolution in Form MGT-14.

5.Send Offer cum Application letter

Either in writing or in electronic mode, within 30 days of recording the names of such persons (i.e. 30 days of EGM).

6.Open a Separate Bank Account

The application money received shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose except for

1. adjustment against allotment of securities; or
2. refunding funds if the firm is unable to issue securities.
3. Receipt of application money

The money shall be received through cheque or demand draft or other banking channels from the Bank Account of the person subscribing to securities except in case of issue of securities for consideration other than cash. The company shall keep the record of the Bank account from where payments have been received.

7.Conduct Board Meeting for Allotment of Securities

The company shall allot its securities within 60 days from the receipt of the application money and if the Company is not able to allot the securities within that period, It must refund the application money to the subscribers within 15 days of the completion of the 60-day period, and if the company fails to do so within that time, it will be liable to repay the money plus interest at the rate of 12% per annum from the end of the sixty-day period.

8.File Return of Allotment

With the Registrar of Companies within 15 days of allotment in Form PAS-3 with the applicable fee along with a complete list of all the allottees.

9.Issuing share certificates

The company shall physical share certificates to the subscribers in Form SH-1 within 2 months from the date of allotment. However debenture certificates shall be issued within 6 months from the date of allotment.

Points to keep in mind:

• The private placement offer and application shall not carry any right of renunciation in favour of any other person.
• The price of such shares shall be determined by the valuation report of a Registered valuer under the Companies (Registered Valuers and Valuation) Rules, 2017,
• The amount received should not be utilised before filing Form PAS-3 (Return of Allotment)
• The payment to be made for subscription to bank account of the person subscribing to such keep the record of the bank account from where been received.

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