A company is a huge organization and multiple functions take place on daily basis. There is a cycle where company receives and pay the amount for receiving and selling the services or their respective product. But there are times, when a company requires funds whose reason may vary from decision to take their production level to increased level, induction of innovative process to boost the revenue to payment of loan, etc.
Nevertheless, the reason there are number of ways a company can raise funds which we will discuss in this article. We can decide the funds are raised in many ways but there are only two ways of positioning in Financials. They can be either liability or assets, depending the way company raises money. Let us discuss them in a little brief.
1) BORROWING:- Borrowing by a company is a liability for company and it is shown under the head Liability under the Balance Sheet Part of Financial Statements, where in the notes further information is included about the liability nature and other important data.
LOAN FROM DIRECTORS
It is one the best and easiest way to raise capital in a company. Loan from Directors come very easily with minimum formalities and it is one the best method used by private companies to raise.
In this only the Board resolution is passed by the Board of Directors. However, it should be noted that Loan from directors should the fund of that director an undertaking is taken by company from lending director that the Loan given by them is their own fund and not further raised or borrowed from someone else.
Also a company needs to file DPT-3 annually every year on or before 30th June of the Financial Year.
BANK/PUBLIC FINANCIAL INSTITUTIONS LOAN
A business loan is a loan specifically intended for business purposes. As with all loans, it involves the creation of a debt, which will be repaid with added interest. There are a number of different types of business loans, including bank loans, mezzanine financing, asset-based financing, invoice financing, microloans, business cash advances and cash flow loans.
As per The Companies Act, 2013 there is no prescribed limit set on maximum amount of raising a loan by company. However, the loan of amount depends upon the working of company, primary and collateral security, number of existence and various terms and conditions as stipulated by different Banks and Public Financial Institutions.
EXTERNAL COMMERCIAL BORROWINGS:-
Any money that is borrowed from a foreign source or foreign institutions (for entities that are eligible to take them as per RBI guidelines and other laws governing such borrowings) the objective of which is to finance the commercial activities in India is known as ‘External Commercial Borrowings’.
The loan amount is received in Foreign currency depending upon the currency of lending country. ECBs include commercial bank loans, buyers’ credit, suppliers’ credit, securitised instruments such as floating rate notes and fixed rate bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc.
The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies.
The Reserve Bank of India raised the ECB limit “for non-banking finance companies (NBFCs) classified as infrastructure finance companies (IFCs) … from 50 per cent to 75 per cent of owned funds, including outstanding ECBs”. In telecom sector too, up to 50% funding through ECBs is allowed. Raising fund through External Commercial Borrowings.
Deposits from the public is also another means of Raising capital by company. Deposits have been defined under the Companies Act, 2013 to include any receipt of money by way of deposit or loan or in any other form by a company. However, it does not include Loans taken by a company from another company;
Deposit is governed as per the Companies Act, 2013 and related rules and a company needs to comply with provision of same to avoid any penal action.
2) OWNED/ EQUITY CAPITAL: In this kind of funds, they are taken as assets of the company in the Balance sheet part of Financial Statements. Let us go through its various ways.
Private placement is a cost effective way of raising capital without going public. “Private placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in section 42 of Companies Act, 2013.
Private Placement is governed by Section 42 of the Companies Act, 2013. As per Section 42 of the Companies Act, 2013 the maximum number of persons to which allotment can be done in a year shall not exceed 200 (Excluding Qualified Institutional Buyers and Employees who have been given securities under ESOP Scheme) in a financial year. If the same exceeds the prescribed limit then in will be deemed to be a public issue and the Company has to follow the procedure of Public issue. As per the present scenario, if a Company, listed or unlisted, makes an offer of Securities to more than 200 persons during a year, whether it receives money or not, to any person whether in India or abroad and intends to get its Securities listed on a recognized stock exchange whether in India or abroad, shall be deemed to be a Public issue and the Company has to Comply with the provisions of Public issue.
The best way to raise funds for an unlisted Company is by way of preferential allotment of shares. Section 62 along with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 and Section 42 along with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes the procedure and provisions for preferential allotment of shares.
There is proper procedure to be followed for preferential allotment and it is simple process. As per Companies Act, 2013, the valuation report shall be made by an independent merchant banker who is registered with the Securities and Exchange Board of India or an independent Chartered Accountant in practice having a minimum experience of ten years, However, as per Rule 11UA of Income Tax Act, only a merchant banker has the capacity to issue valuation report.
INITIAL PUBLIC OFFER
An IPO is when a company which is presently not listed at any stock exchange makes either a fresh issue of shares or makes an offer for sale of its existing shares or both for the first time to the public. Through a public offering, the issuer makes an offer for new investors to enter its shareholding family.
The shares are made available to the investors at the price determined by the promoters of the company in consultation with its investment bankers. The provision of the Companies Act, 2013, and Securities Board of India (SEBI) regulations also regulates the Initial public Offer. There are number of benefits like:-
FURTHER PUBLIC OFFER
A follow-on public offer (FPO) is also called further public offer. When a listed company comes out with a fresh issue of shares or makes an offer for sale to the public to raise funds it is known as FPO.
In other words, FPO is the consequent issue to the public after initial public offering (IPO).
In case, a company wants to come out with FPO and have changed its name within a year, at least 50% of the revenue of the last one-year must have come from the activities defined by the new name. The size of the issue should not be more than five times the pre-issue net worth of the company as mentioned in the balance sheet of the previous financial year.
Again, further public offer is also governed by the Companies Act, 2013, and Securities Board of India (SEBI) regulations.
Disclaimer: – The above article is written just for the informative purpose. Under no circumstance, the author shall not liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.
(The Author is Corporate Consultant and provides varied array of services including Start-ups mentor, Secretarial, Legal, Trademark, taxation, Audit, GST, Book keeping and other ancillary advisory service in Delhi, Chandigarh as well as The National Capital Region (NCR) and can be contacted through email id:- [email protected] and Contact Number: 91-8178515005)