Whenever Company has requirement of fund to enhance its business, it has two options –
First- Owned Fund
Second- Borrowed Fund
♦ OWNED FUND: (Sharing of ownership and control)
1. Equity Share Capital
2. Preference Share Capital
♦ BORROWED FUND: (Interest Cost)
1. Financial Institutions
2. Commercial Banks
3. Inter Corporate Loan
4. Directors & its relatives
5. Shareholders (with prescribed Condition)
A- CLASSIFICATION OF OWNED FUND:
1. Equity Share Capital:
- It is a long-term capital which means it stays permanently with the business.
- There is no burden of paying interest or installments.
- A Company can issue shares at a face value.
- A Company can issue shares with premium (above face value) only with certification of registered valuer. A company can issue of securities in any of the following manners:
(a) PRIVATE PLACEMENT:
- A private placement shall be made only to a selected group of persons as identified by the Board, whose number shall not exceed 50 in a single offer.
- A private placement offer cannot be made to more than 200 people in aggregate in a financial year.
- The value of such offer or invitation per person shall be with an investment size of not less than Rs. 20,000/- of face value of the securities.
- Member’s Approval by way of Special Resolution is required.
- Prepare the Private Placement offer in From PAS – 4.
- Open separate Bank account for keeping subscription Money.
- Make the Allotment within 60 days from the date of receipt of application money.
(b) RIGHT ISSUE:
- Prepare the Letter of Offer along with application and renunciation form.
- Board’s Approval for approving issue & letter of Offer
- Dispatch the Letter of offer to members
- The right issue offer has to be kept open for a minimum of 15 days and maximum of 30 days.
- With the approval of at least 90% of its members in writing for a shorter period, it can do all this process without time bonding.
- Make the Allotment & filing of Return of Allotment in PAS-3.
- There are two Types of Equity Shares :
With Voting Rights:
- Every member of the company shall have a right to vote on every resolution placed before the company.
- Voting rights shall be in proportion to his share in the paid up equity share capital of the company.
With Differential Voting Rights as to Dividend, Voting or otherwise:
- With the Member’s approval, a Company can issue the Equity shares with no voting rights or dividend rights.
- Private Limited Companies are exempted from section 43, if either its memorandum or articles of association so provides.
- Private companies can issue equity shares with differential voting rights without compliance of conditions related thereto specified under the Companies (Share Capital and Debentures) Rules, 2014.
2. Preference Share Capital:
- Preference shareholders have limited voting rights; therefore the control of a company is in the hands of its equity shareholders.
- A private limited company having share capital may issue preference shares, if authorized by the articles of association of the company.
- Member’s Approval by Special Resolution is required.
- No Company can issue Preference shares which are irredeemable, after the commencement of the Companies Act, 2013.
- Preference shares can be classified into the following types based on the rights:
a) Cumulative Preference Shares:
- Holders of cumulative preference shares are entitled to receive the divided for a year in which dividends could not be paid due to losses or inadequate profit in the subsequent year(s) whenever there are sufficient profits.
b) Non-Cumulative Preference Shares
- Holders of non-cumulative preference shares are NOT entitled to receive the dividend for a year in which dividends could not be paid in the subsequent year(s).
- For non-cumulative preference shares, the right to dividend for a year cannot be carried over in subsequent years.
c) Redeemable Preference Shares
- Redeemable preference shares are those shares that would be redeemed by the company within a period of 20 years from the date of issue.
- Redemption can be made only out of the profits available for distribution as dividend or out of the proceeds of fresh issue of shares made for purpose of redemption.
- Only fully paid up shares can be redeemed.
d) Optionally Convertible Preference Shares:
- Two options are available with Optionally Convertible Preference Shares, either they can be redeemed or they can be converted in to equity shares.
e) Compulsory Convertible Preference Shares:
- Convertible preference shares can be converted into equity shares of the company as per the terms and conditions of their issue.
- Now a days CCPS (Compulsory Convertible Preference Shares) are increasingly becoming preferred investment instrument for high net worth.
Section 2(30) of the Act defines debentures as: “debenture” includes debenture stock, bonds, or any other instrument of a Company evidencing a debt, whether constituting a charge on the assets of the Company or not.”
Types of Debentures:
a) Secured Debentures:
- Secured debentures may be issued for a term not exceeding 10 years by a company after complying certain conditions.
- Following Class of Companies can issue debentures exceeding 10 years but not exceeding 30 years :
- Engaged in setting up of Infrastructure projects
- Infrastructure Finance Companies
- Infrastructure Debt Fund Non – banking Financial Companies
- It must be secured by the creation of a charge, on the properties of the Company.
- Company has to execute the Debenture Trust Deed & appoint the Debenture Trustee also.
- Company needs to create the Debenture Redemption Reserve for the purpose of redemption of debentures out of the profits available for payment of Dividend.
b) Unsecured Debentures:
- A company cannot issue unsecured debentures to individuals, it can be issued only to companies or else it will treat as Deposit under Section 73 of the Companies Act, 2013.
- If it issued Debentures to Companies, it will treat as Inter corporate Deposit/Loan. (ICD)
c) Compulsory Convertible Debentures:
- The issue of Compulsory Convertible Debentures shall be governed by Section 42, 71 & 62 of Companies Act 2013.
- Pursuant to provision of Section 42, 62(3) and 71, Compulsory Convertible Debentures shall be approved by a special resolution passed at a general meeting
- As per rule 18 of Companies Share Capital and Debentures Rules, 2014, No Debenture Redemption Reserve is required in case of Compulsory Convertible Debentures.
- Convertible Debentures are converted into equity shares of the company as per the terms and conditions of their issue.
- If a Company is issuing compulsory convertible debentures, it need not to execute debenture trust deed as the said are not securing anything.
Now a days secured CCDS (Compulsory Convertible Debentures) are beneficial to the investor since they get an opportunity to become the owner of the company and might leave in case the company experiences the loss.
B- CLASSIFICATION OF BORROWED FUND:
1. Financial Institutions:
2. Commercial Banks:
3. Inter Corporate Loan:
4. Directors and its relatives:
- Director/Relative of Directors are allowed to give a loan of any amount to the company subject to following condition.
- Director/Relative will submit a declaration with the Company that amount is not being given out of the funds acquired by him by borrowing or accepting loans or deposits from others.
5. Shareholders of the Company:
- Loan from Shareholders are allowed up to 100% of aggregate of the paid up share capital and free reserves, but
it can accept any amount form its members, if it fulfills all of the following conditions, namely:
a) which is not an associate or a subsidiary company of any other company;
b) if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid-up share capital or fifty crore rupees, whichever is lower; and
c) such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section.
Disclaimer:- The entire contents of this document have been prepared on the basis of relevant provisions and rules and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.