{"id":12243,"date":"2020-07-06T14:38:10","date_gmt":"2020-07-06T09:08:10","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=12243"},"modified":"2022-11-16T15:06:36","modified_gmt":"2022-11-16T09:36:36","slug":"private-limited-company-funding-sources","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/private-limited-company-funding-sources\/","title":{"rendered":"Private Limited Company: Funding &amp; Sources"},"content":{"rendered":"\n<p class=\"has-drop-cap\">Companies in India usually\ndifferentiate by two categories, i.e., a public limited company and a private\nlimited company. As per section 2(68) of Companies Act, the private company is\nthe entity whose Article of Association (AOA) refuses the transferability of\nshares in any given state. It means that shares of the private companies are\nisolated from the outside public for funding purposes.<\/p>\n\n\n\n<p>Whether it is private or public, every company needs ample funds to survive the competition. Finance acts as a fuel that propels the business and decides its fate. The <strong>Companies Act 2013<\/strong><sup><a class=\"text-primary\" href=\"https:\/\/www.mca.gov.in\/content\/mca\/global\/en\/acts-rules\/companies-act\/companies-act-2013.html\"><strong>[1]<\/strong><\/a><\/sup> is the regulatory framework that governs all types of companies.  <\/p>\n\n\n\n<p><strong>Private can borrow the fund from the following:-<\/strong><\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" width=\"576\" height=\"365\" src=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2020\/07\/image-25.png\" alt=\"Private can borrow the fund\" class=\"wp-image-12244\" srcset=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2020\/07\/image-25.png 576w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2020\/07\/image-25-300x190.png 300w\" sizes=\"(max-width: 576px) 100vw, 576px\" \/><\/figure><\/div>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/private-limited-company-funding-sources\/#Governing_Act_and_Rules\" >Governing Act and Rules<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/private-limited-company-funding-sources\/#Funding_alternatives_for_Private_Limited_Company\" >Funding alternatives for Private Limited Company<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/private-limited-company-funding-sources\/#Private_Placement_of_Shares\" >Private Placement of Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/private-limited-company-funding-sources\/#Angel_Investors_and_Venture_Capital\" >Angel Investors and Venture Capital<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/corpbiz.io\/learning\/private-limited-company-funding-sources\/#Conclusion\" >Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Governing_Act_and_Rules\"><\/span>Governing Act and Rules<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Before we proceed, let us\ngrasp the basic rules and provisions w.r.t funding modes for the Private\nLimited Company. All the company\u2019s funding provisions are mentioned under\nSection 73 of the Companies Act, 2013 and the Companies (Acceptance of\nDeposits) Rules, 2014. Rule 2(1)(c) of the Companies (Acceptance of Deposits)\nRules, 2014 elaborate the term \u2018deposit\u2019 and the same render the brief list of\nexempted deposits which are \u2013<\/p>\n\n\n\n<ul><li>Receiving any\namount via State or Central Government.<\/li><li>Receiving any\namount via any company.<\/li><li>Receiving any\namount via directors or their relatives. <\/li><li>Receiving any\namount via FEMA governed bank or foreign bank. <\/li><li>Receiving any\namount via Public Financial Institutions.<\/li><\/ul>\n\n\n\n<p>Any fundraising of the private company seeks the approval of core members via Board\u2019s Resolution, as per Section 179 (3) of the Companies Act, 2013 <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Funding_alternatives_for_Private_Limited_Company\"><\/span>Funding alternatives for Private Limited Company<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Funding in a Private\nLimited Company usually can get accomplished in two ways.<\/p>\n\n\n\n<ul><li><strong><em>Internal<\/em><\/strong><em>&#8211; The additional\nissue of share capital, deposits availed from the members, deposits done by the\ndirector.<\/em><\/li><li><strong><em>External<\/em><\/strong><em> &#8211; Bank finance,\nangel investors, venture capital, etc<\/em>.<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Internal funding options <\/h3>\n\n\n\n<h4 class=\"wp-block-heading\">An additional issue of share capital<\/h4>\n\n\n\n<p>When it comes to Funding in Private Limited Company, the issuing of additional share capital is regarded as one of the most suitable options. It could help the company to raise the fund in no time and render better incentives to the shareholders. However, the company needs to ensure conformity with section 62 of the Companies Act, 2013, to serve this purpose. <\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Deposits from Directors and their Relatives<\/h4>\n\n\n\n<p>Deposit from Directors and their relatives is another source of Funding in Private Limited Company. However, this nature of fundraising is subjected to the following conditions. The relevant directors must give a written declaration regarding their assurance w.r.t the nature of fundraising. If the acquired funds were raised through the others, then it shall not be accepted as a deposit. Moreover, the detail of such a deposit needs to incorporate in the Board\u2019s report.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">List of the eligible depositors serving as Directors relative<\/h4>\n\n\n\n<ul><li>Members of a Hindu Undivided Family<\/li><li>Son, including stepson<\/li><li>Father, including stepfather<\/li><li>Spouse of Director<\/li><li>Mother, including the stepmother<\/li><li>Brother, including stepbrother(s)<\/li><li>Daughter, including stepdaughter<\/li><li>Daughter\u2019s husband<\/li><li>Son\u2019s wife<\/li><li>Sister, including stepsister(s)<\/li><\/ul>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/procedure-for-registration-of-private-limited-company-india\/\">Private Limited Company Registration Procedure in India<\/a><\/mark><\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Deposits from its employee<\/h4>\n\n\n\n<p>Fundraising via employee\u2019s deposit in another conducive method of Funding in Private Limited Company. Such deposits cannot exceed the threshold of an employee\u2019s annual salary as per the given provisions. <\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Deposits from its members<\/h4>\n\n\n\n<p>Section 73 (2) of the Companies Act, 2013, has a provision for Funding in Private Limited Company via member&#8217;s deposits. The following conditions need to be fulfilled in this aspect. <\/p>\n\n\n\n<ul><li>A circular must be distributed about the same among the core members. The circular must cover the following aspects:<\/li><li>Company\u2019s credit rating<\/li><li>List of depositors<\/li><li>The amount due to the previous deposits.<\/li><li>The circular\u2019s copy ought to be submitted to Registrar within thirty days prior date of the issue of such circular.<\/li><li>The sum of such a deposit should not be less than 20% of the sum of the deposit maturing in the bank account, aka deposit repayment reserve account. Such deposits are time-dependent, which needs to be procured, on or before April 30 every year. <\/li><li>Certifying that the firm has not breached repayment\u2019s provisions w.r.t deposit accepted and interest paid on such deposits. <\/li><\/ul>\n\n\n\n<p><strong>The\nprovisions above do not apply to the following private companies:-<\/strong><\/p>\n\n\n\n<ol><li>The company\u2019s loan amount from its member is well behind the threshold of 100% of paid-up capital, Securities Premium account, and free reserves. <\/li><li>The Private Limited Company is not older than five years.<\/li><li>The Private Limited Company that covers the given conditions \u2013<\/li><\/ol>\n\n\n\n<ul><li>The company should be a sole-runner instead of an associate or a\nsubsidiary. <\/li><li>The total amount of raised funds is lower of Rs 50 Crore or the\ntwice of its paid-up capital. <\/li><li>The company is not involved in the violation of repayment terms w.r.t\nexisting borrowings.<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>External funding\noptions<\/strong><\/h3>\n\n\n\n<p><strong>A loan from financial institutions: <\/strong>Fundraising via banks and other financial institutes is the most preferred way of money borrowing. Someone with a better credit record and market repo can easily raise loans from banks compared to other options, where money security is a major concern. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Private_Placement_of_Shares\"><\/span>Private Placement of Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>As per Section 42 of the\nCompanies Act, 2013, private placement of shares to a selected group can also\nbe a part of the fundraising strategy. Section 14 of Company Act 2013 and\nCompanies (Prospectus and Allotment of Securities) Rules, 2014 cover the\nprovisions for such arrangement.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Key factors<\/h3>\n\n\n\n<ul><li>A shareholder\u2019s\napproval is a must when it comes to allotment of share. The Company Act directs\ncompanies to resolve such matters at a board meeting. <\/li><li>The private\nallotment of shares shall be conducted as a trusted person; someone is known\nfor years and had a stringent relationship with the company. <\/li><li>The professional\ndealing with the securities under a scheme w.r.t employee\u2019s stock option cannot\nbe a part of such purpose. <\/li><li> Threshold w.r.t allotment of share, in this case, is limited to 200 in a financial year.  <\/li><\/ul>\n\n\n\n<p>This provision acts differently in case of allotment of securities. Such a section seeks approval of Registrar after the submission of relevant documents illustrating the detail regarding security holders, basic info, and the number of security.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Angel_Investors_and_Venture_Capital\"><\/span><strong>Angel Investors and Venture Capital<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Angel investors and venture\ncapital also act as funding options available for private limited companies.\nThe angel investors represent the groups of individuals, whereas the Venture\ncapital is a company holding that seeks ownership stake in exchange for lending\nrequired funds. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span><strong>Conclusion <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Funds are crucial to run day to day business activities of the organization. The scarcity of finances can result in a liquidation of tangible assets. The deposits from different sources act as a reservoir of funds for the company that could be used to compensate for the loss. Since fundraising in the private limited company comes under strict compliance, the result could be penalty oriented if not undertaken correctly. If you still have some questions w.r.t Funding in a <a href=\"https:\/\/corpbiz.io\/company-registration\"><strong>Private Limited Company Registration<\/strong><\/a>, kindly used our comment section for swift feedback.  <\/p>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/powers-of-registrar-for-removal-of-name-of-company\/\">Powers of Registrar for Removal of Name of Company from Register of Companies\n<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Companies in India usually differentiate by two categories, i.e., a public limited company and a private limited company. As per section 2(68) of Companies Act, the private company is the entity whose Article of Association (AOA) refuses the transferability of shares in any given state. It means that shares of the private companies are isolated [&hellip;]<\/p>\n","protected":false},"author":22,"featured_media":12260,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[734],"acf":{"service_id":"1"},"authorName":"Pankaj Tyagi","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2022\/01\/MicrosoftTeams-image-42.jpg","authorDescription":"Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.","postViews":14424,"readingTime":4,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/12243"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/22"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=12243"}],"version-history":[{"count":16,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/12243\/revisions"}],"predecessor-version":[{"id":50760,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/12243\/revisions\/50760"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/12260"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=12243"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=12243"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=12243"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}