Private companies are prohibited from making invitation to the public to subscribe to the securities of the company.
A Private Limited Company can raise funds by issuing shares and Debentures to Its Existing shareholders, Directors, relatives, Business partners etc.
RAISING FUNDS BY ISSUE OF SHARES
The Companies Act, 2013 does not prescribe minimum share capital. However, it restricts the number of shareholders in a private limited company to maximum 200 at any point of time.
Shares issued by private company can be EQUITY SHARES and PREFERENCE SHARES.
Equity shares carry voting rights and represent ownership of the company while Preference shares carry preferential rights to company’s profits and assets.
Shares known as cumulative preference shares allow owners the ability to receive cumulative dividend payments from the firm even if they are losing money. When the firm is not making a profit, these dividends are recorded as arrears and are paid on a cumulative basis the following year when the company is profitable.
Indifferent Preference Dividends in the form of arrears are not collected by shares. When it comes to shares, the company's current year profits are used to pay out the dividend. Therefore, stockholders will not get any dividends for a given year if a firm is not profitable.
Redeemable preference shares are those which are redeemed or purchased back by the issuing company at a fixed rate on a future date.
Irredeemable preference shares are shares of infinite tenure
However, the companies Act, 2013 prevents a company from issuing irredeemable preference shares. A company limited by shares can issue preference share which shall be redeemed within a period not exceeding 20 years from the date of their issue.
Participating preference shareholders have the right over company’s extra earnings in addition to receiving dividends at fixed rates.
Non-Participating shareholders only receive dividend at fixed rates.
Convertible preference shares are those which can be converted into Equity shares at a future date.
Non-Convertible preference or redeemable preference shares are those which cannot be converted into Equity shares rather they shall be redeemed on the expiry of their period.
RAISING FUNDS BY ISSUE OF DEBENTURES.
Written documentation that acknowledges a debt to the company is known as a debenture. It includes a contract for the payment of interest at a given rate due often either half-yearly or yearly on specific dates, as well as for the return of principle after a set length of time, at intervals, or at the company’s discretion.
A Private company cannot issue debentures with voting rights.
On issue of debenture, the Company shall create a Debenture Redemption Reserve (DRR) out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilized by company except for redemption of debentures.
The company is required to pay interest and redeem the debentures in accordance with the terms and conditions of their issue.
A company is not permitted to issue debentures to more than 500 individuals without first selecting a debenture trustee, whose responsibility it is to safeguard the interests of debenture holders and address their complaints.
Secured Debentures are those that have a charge placed on the company's assets for the purpose of payment in the event of default.
The maximum period of redemption is 10 years from the date of issue, except for certain specified companies where the maximum redemption period can be exceeding 10 years but not exceeding 30 years.
These debentures are not secured by the way of charge on company’s assets. These debentures are also known as naked debentures.
Redeemable Debentures are those which are payable on the expiry of the specific period (Maximum period 10 years from the date of issue, except for certain specified companies where the maximum redemption period can be exceeding 10 years but not exceeding 30 years) either in lump sum or in installments during the life time of the company. Redeemable Debentures can be redeemed at par or at premium.
Because the corporation does not guarantee the return of the money borrowed by issuing such debentures, irredeemable debentures are also known as perpetual debentures. These bonds are repayable upon a company's dissolution or over a protracted length of time.
These debentures are transferable by the simple delivery of debenture certificates and payable to the debenture holder. Unregistered debentures are another name for these bonds.
These debentures must be transferred in accordance with the provisions of the Companies Act 2013 by completing transfer documents and having the transfer registered by the firm. They are not transferable by simple delivery of debenture certificates.