Fund raising is always considered to be the most critical exercise in the companies whether it is private limited companies, public limited companies or one person company.
Every company has to hassle to grab the lion's share and have to resort to different options available. Companies Act, 2013 provides various sources of finances which include broadly followings:
- Issue of shares
- Raising of finance through issue of Debentures
- Acceptance of Deposit
The company normally don't go for first two options because, in case of equity shares, promoters are reluctant to issue shares to a new person as it leads to the reduction in percentage holding of the existing promoters. Moreover, to go to the public for getting enough money is available to public limited companies only.
As far as debenture is concerned, there are some draconian provisions which discourage the companies.
Further, access to funds through deposits seems to be long and cumbersome procedures. Moreover, this option is only available to public limited companies because private limited companies can only accept from its existing shareholders and not from the public.
Even if private limited companies accept the deposit from existing shareholders then it has to follow the procedures which are again time-consuming but MCA relaxed most of the requirements last year. The main issue which every corporate is facing because of the definition of deposit which covers almost every transaction which makes harder to adopt this route.
In order to promote the young enterprise, the MCA further tweaked the deposit rules to secure the funding for startups companies. Startups in India are defined as private limited companies. Now if the startups receive any amount in the form of a convertible note then it shall not be considered as deposit under the Companies Act, 2013.
Though it is not a big amount but still now startups can have a sigh of relief because otherwise, they have to follow the standard procedures which are prescribed under the companies act, 2013.