Raising Funds for Private Limited Company
- October 18, 2022
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Raising Funds for Private Limited Company
For the sustained growth and success, it is essential for every private limited company to have sufficient funds. Lack of funding to suffice the operational requirements is one of prime reason for business failure majorly in initial years.
Unlike Public Limited Company or Private limited companies are prohibited to raise capital from the public. Thus it is often difficult for the Promoters of Private Limited Company to infuse funds for the projects and operations of the company. As per companies Act 2013, any private limited company can raise fund via following three methods-
- Deposits
- Loans
- Further issue of capital
Deposits from members - The private limited company can accept deposits only from its members up to 100% of its paid-up capital and Free Reserves & Securities Premium account provided it files with the Registrar information about such acceptance. The above limit of 100% of paid-up share capital & free reserve should be calculated based on the last audited Financial Statements adopted by the members. Further one of the preconditions of the accepting deposits from the members is that the deposit can only be accepted from the members whose name appears on the registers of members of companies. Further, an ordinary resolution shall also be passed.
Loan from members - A private limited company is empowered to accept loans from its directors and members. Further, before the loan transaction is complete the Director at the time of giving money should give the declaration that amounts so advanced is not given out of the funds acquired by the director from others as loan or depositor out of borrowing.
The further issue of capital - The private limited company raises funds by issuing further capital to the existing shareholders. The company has multiple options like the private placement of shares, bonus issue and bonus issue. The detailed explanation of the three options is as follows-
Private Placement - Private Placement means offering the securities to a selected group of persons by the company other than by the way of the public offer. The crucial condition to be fulfilled for private placements is that under a Private Placement Offer Letter cannot be made to more than 200 people.
Right issue/Preferential Issue - Through right an option is made to the company's existing security holders to buy additional shares. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the issuer at a specified price within a subscription period.
Bonus Issue - Bonus shares are additional shares given to the present shareholders for no additional cost based on the number of shares held by the shareholder. Announcing a share bonus can help a company capitalize a part of its reserves and surplus and/or reduce the price of shares, thereby increasing its marketability. Issuing Bonus shares is the most feasible option for every private limited company.
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