How to raise funds in a Private Limited Company

In a Company registered as per Companies Act, 2013, there are three methods through funds can be raised;
a. Deposits
b. Loans
c. Capital

Raising Capital in a company requires great attention. There can be further three sub points to raising capital in a Private Limited Company;
a. Private Placement
b. Rights Issue
c. Bonus Shares

Private Placement is actually issuing shares to select group of people may be existing shareholders, friends, family etc
For Private Placement, there are procedures defined as per Companies Act 2013. You can read the article given in the blog on Private Placement of Shares at
http://csnehasethassociates.blogspot.in/2015/05/private-placement-of-shares.html

Coming to RIGHTS ISSUE,

A rights issue is directly offered to all existing shareholders of  the Company in proportion to their current holding. The company also set a time limit for the shareholder to buy the shares. Companies pursue Rights Issue as an avenue to raise funds for various reasons, ranging from expansion or acquisitions to paying down debts.

Section 62 of Companies Act, 2013 contains provisions on “further issue of capital”, and enacts the principle of pre-emptive rights of shareholders of a company to subscribe to new shares of the company.

Provisions of Section 62 of Companies Act, 2013 are mandatory for all Private companies, public Companies, listed as well as unlisted companies.

RELEVANT PROVISIONS OF COMPANIES ACT-2013:

Sec 62 (1) Where at any time, a company having a share capital proposes to increase its subscribed capital by issue of further shares, such shares shall be offered :

(a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:—

(i)         the offer shall be made by notice specifying number of shares offered and limiting a time not being less than 15 days and not exceeding 30 days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

(ii)        unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right;

(iii)       after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company;

PROCEDURE FOR ALLOTMENT OF SHARES ON RIGHT ISSUE BASIS :

• Issue notice in writing to every Director at least seven days’ before convening the Board meeting. [Sec 173 (3)]
• 
  
• Convene a Board Meeting
• Pass a Board resolution for approving “Letter of offer”. The offer letter shall include right of renunciation also.
• Dispatch Letter of offer to all existing shareholders through registered post or speed post or through electronic mode at least three days before the opening of the issue.
• Receive acceptance, renunciations, rejection of rights from shareholders.
• Issue notice in writing to every Director at least seven days’ before convening the Board meeting. [Sec 173 (3)]
• Convene a Board Meeting
• Pass Board resolution for approving allotment and issue of shares.
• File with Registrar a return of allotment in E-Form PAS-3 within 30 days of allotment of shares.
• File E-form MGT 14 within 30 days of Issue of securities.

OTHER INFORMATION:

• There is no prescribed format for “Letter of offer” to be issued, in case of right issue of securities. Format of Letter of offer” prescribed in Section 42 Companies Act, 2013  and rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014 and not for Section 62.

• Letter of offer shall specify the number of shares offered and other information and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

• Attach with E-Form PAS-3 (i) Board Resolution for allotment and issue of share. (ii) Letter of offer (iii) List of Allottees

• List of Allottees attached with E-Form PAS-3 shall state the names, address, occupation, if any, of the shareholder and number of securities allotted to each of the allottees and the list shall be certified by the signatory of the Form PAS-3 as being complete and correct as per the records of the Company.

Please note that Rights Issue is desirable option if you are issuing shares at par even if you are issuing shares to new shareholders who may be relatives of existing Shareholders.

Right issue to existing share holders in the ratio (Total funds required/value of share = No of rights to be issued) . Thereupon work out the ratio in which the existing shareholders get their rights (Total new shares/existing shares). 

Now that  shareholders will subscribe & renounce the surplus in favour of their respective relatives as this process is less cumbersome compared to Private Placement. 

My Views: For rights issue no valuation is required, not required to open separate bank account, board approval is sufficient, issue price can be determined by the board. The option holder always have right to renounce their right options.

 This is no way a illegal methodology as all the outsiders are relatives to the shareholders, lets give them excess and they have option to renounce, upon which you bring them. This should work fine.

For formats for Rights Issue, please contact us at CS Neha Seth at csnehaseth@gmail.com

or call us at 9540074449