SOURCES OF FUNDING - Private Limited Company
SOURCES OF FUNDING - Private Limited
Company
Background:
If
Promoters are starting a business (Company) or trying to grow an existing business (Company), all certainly will need
money. This money can come from various sources.
Source
of Funding:
Roughly
speaking, Investments break down into two different forms: Debt and Equity.
Debt Funding: Debt means money borrowed from lenders by the company and it pay the
interest on that investment. Companies are required to repay the money with
interest over time. Debt include debentures, loans and borrowing etc.
Equity Funding: Company can take on an
equity investment - in which Company can sell a portion of the Company to an
investor in return for cash or something else of value. Equity funding includes
shares (Equity/Preference Shares).
Generally
first source of capital will probably be the loan from promoters. Few
businesses are entirely funded by parties other than the entrepreneur. There
are definite advantages for promoters here: 100% control and ownership. Promoters
own the whole company, control the show, and stand to reap the gains so that
your venture become valuable.
In this article we will
discuss funding of Private Limited Company by Debt .
As per sub-clause (iii) of Clause 68 of Section 2 of Companies
Act, 2013 definition of Private Company “means a Company which by its articles prohibits any invitation to the public to subscribe for any securities of the
Company;
Loan & borrowing:
§ Section 179(3) The Board of directors of the Company shall borrow
money on the behalf of Company means of resolutions passed at meetings of Board
of Directors.
§ Section 2(31) Includes any receipt of money by way of deposit or Loan
or in any other form by a Company.
B.
RULES INVOLVED:
§ Rule 4,5,6,7 of (The Companies (Acceptance of Deposits) Rules,
2014- Forms and particulars of advertisements or circulars, manner and extent
of deposit, Creation of security and of Trustee for deposits
§ Rule 18 of The Companies (Share Capital and Debenture) Rules, 2014
C.
CIRCULAR INVOLVED:
§ G.S.R. 464(E) dated 5th June, 2015 –
-
According to this circular there
is no need to file MGT-14 by Private Limited Company on acceptance of loan.
-
Section 180 does not apply
on the Private Limited Company.
-
Clause (a) to (e) of
sub-section (2) of Section 73 shall not apply to Private Limited Company which
accepts any monies from its members monies not exceeding 100% of aggregate of
the paid up share capital and free reserves, and such Company shall file the
details of monies so accepted to the Registrar in such manner as may be
Specified.
§ G.S.R.
695(E) dated 15th September, 2015-
The Companies (Acceptance of Deposit) second amendment Rules, 2015’
§
D.
FORMS INVOLVED:
No form is required to be filed with ROC in case
of acceptance of Loan by Private Limited Company.
E.
RESOLUTION INVOLVED:
§ For the acceptance of Loans by the Private Limited
Company a “[3]Board
Resolution” shall be passed in the Board Meeting of the Company.
§ Board
Meeting can be held through video conferencing also.
i. Loan From Directors:
As per
Chapter V, Companies (Acceptance of Deposits) Rules, 2014, point VIII of definition of Deposit.
Any amount
receipt from a person, who at the time of acceptance was a Director of the Company,
will not be considered as Deposit.
Note:
·
Position at the time of acceptance
of Deposit will be considered.
·
Director 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.
·
Company can accept any amount of Loan
from the Director.
ii.
Loan from shareholders:
a.
Private
Limited Company can accept deposits from the Members upto 100% of aggregate of the
paid up share capital and free reserves. (Clause (a) to (e) of Section 73(2)
will not be applicable on Private Limited Company if deposit is upto 100% of
paid up share capital and Free Reserve)
b.
[4]If the Company wants to accept the deposits
of more than 100% of paid up share capital and free reserve from the members of
the Company then company can accept the same by following the procedure
mentioned under Section 73.
iii.
Loan from Relatives of Directors:
As per
Companies (Acceptance of Deposit) second amendment rules, 2015 in rule 2, in
sub-rule (1), clause (c), of sub-clause
(viii), the following shall be substituted, namely:-
(viii) any
amount received from a person who, at the time of the acceptance of the amount,
was a director of the Company or a relative
of the director of the private limited company.
Any amount
receipt from a person, who at the time of acceptance was a relative of director
of the Company, will not be considered as Deposit.
Note:
·
Position at the time of acceptance
of Deposit will be considered.
·
Relatives of directors will submit
a declaration with the Company that amount is not being given out of funds
acquired by him by borrowing or accepting loans or deposits from others.
·
Company can accept any amount of
Loan from the relative of director.
·
The Company shall disclose the
details of money so accepted in the Board’s Report.
iv.
Loan from other Company:
As per sub
clause (vi) of clause (c) of rule 1 of the Companies (Acceptance of Deposits)
Rules, 2014, Deposit doesn’t include any amount received by Company from any
other Company (Inter corporate Loans).
Conditions:
The
Company which is giving the loan complies with the conditions of Section 186
and Section 185 of Companies Act, 2013. These sections are not applicable on
the Company accepting the loan.
Ø
Allowable Loan Foreign Holding to Indian
Subsidiary.
Section 185 is applicable only when a
‘company’ gives loan to its director or any person in whom the director is
interested. However, the definition of a ‘company’ under Section 2(20) means
only a company incorporated under 2013 Act or any previous company law. So, the
restriction in Section 185 will not apply when a holding company incorporated
outside India gives a loan, guarantee or security to its Indian subsidiary.
Ø
Loan Holding – Wholly Own Subsidiary
Any loan made by a Holding Company to
its Wholly own Subsidiary Company or any guarantee given or security provided
by a Holding Company in respect of any loan made to its wholly own subsidiary
Company. Condition:
loan made under this clause utilized by
the wholly own subsidiary company for its principal business activity only.
Ø Company can accept Loan also from Section 8 Companies, one person
Company.
As per sub clause (x) if clause (c) of rule 1 of the
Companies (Acceptance of Deposits) Rules, 2014, Deposit doesn’t include any
amount received from any employee of the Company not exceeding his annual salary under a contract of
employment with the company in the nature of non-interest bearing security
deposit.
vi.
Loan from government entities:
State/ Central Govt.
· Any
amount received from the Central Government or a State Government, or any
amount received from any other source whose repayment is guaranteed by the
Central Government or a State Government or any amount received from a local
authority, or any amount received from a statutory authority constituted under
an Act of parliament or a state legislature;
· Any
amount received from foreign Governments, foreign/ international banks,
multilateral financial institutions (including, but not limited to,
International Finance Corporation, Asian Development Bank, Commonwealth
Development Corporation and International Bank for Industrial and Financial
Reconstruction), foreign government owned development financial institutions,
foreign export credit agencies, foreign collaborators, foreign body Corporates
and foreign citizens, foreign authorities or persons resident outside India
subject to the provisions of Foreign Exchange Management Act, 1999 and rules
and regulations made there under
Loan from Banking Company:
·
Any
amount received as a loan or facility from any banking company or from the
State Bank of India or any of its subsidiary banks or from a banking
institution notified by the Central Government under section 51 of the Banking
Regulation Act, 1949 (10 of 1949), or a corresponding new bank as defined in
clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980 (5 of 1970), or from a co-operative bank as defined in
clause (b-ii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934);
vii.
Loan from other sources:
§ Any non-interest bearing amount received or held in trust;
§
Section 2(30) Debenture
include debenture stock, bonds or any other instrument of a Company evidencing
a debt. A Company may issue debentures under Section 71 of CA-2013.
6. Companies are not
allowed to borrow from followings
As per Section 185: No Company ( Private & Public)
·
Directly or Indirectrly
·
Advance any loan, including book
debt,
·
to any of its directors or to any **other person in whom the director is interested
Other person in whom the director is interested:
i.
Any private company of which
director is a director or member
ii.
Body Corporate in which 25% or
more voting power rests with one or more directors
iii.
Body Corporate whose Board
accustomed to act on directions of BOD or Directorsof lending company.
It is clear
from the above mentioned extract provision of Section 185 that, A Company can’t
give the loan to Director and person in whom the director is interested.
Example:
I.
If Mr. A is Director of Company
XYZ (Private Limited Company) and Director of Company PQR. Then Company PQR
can’t accept loan from Company XYZ.
II.
If
Mr. A is Director of Company XYZ (Private Limited Company) and member of
Company PQR. Then Company PQR can’t accept loan from Company XYZ.
II.
Loan from HUF:
The exemption under
sub-clause [6](viii)
of clause (b) of Rule 2 of the Companies (Acceptance of Deposits by Companies)
Rules, 2014 would apply only to deposits received from directors or relative of
director. The exemption will not apply to HUF in which all the members of HUF
are Directors of the Company or Member of the Company.
Whether HUF can be
treating as Relative of Director?
NO, It can’t be treated as
relative of the Director. Because as per Companies Act Clause 2(77) “Relative
with reference to any person, means they are member of HUF”.
Example: A, B, C, D being members of HUF
(related to each other) are also the director of the Company. But HUF shall not be treated as relative of
A,B,C,D.
Whether HUF can be
Member?
As per Clause 2(55)(ii)
of the Companies Act, 2013 “members in relation to a Company means-every other PERSON
who agrees in writing to become a member of the Company and whose name is
entered in the register of member of the Company.
In the case of a joint
Hindu family, as it is not a person it cannot be a subscriber, though the Karta
or manager may be one. A HUF can be member through its Karta or Manager.
Therefore, HUF can’t be
a member directly; it can’t give loan to Company. If Company accept loan from
HUF it will be treated as a deposit.
Whether Company can
accept loan from HUF If, Karta is shareholder/Director of the Company:
No, Company can’t accept
loan from a HUF even if its Karta is member /director of the Company. Because
Company can accept loan only from person except Director/Member or Relative of
the Director.
III.
Loan from Partnership Firm:
The
exemption under sub-clause [7](viii)
of clause (b) of Rule 2 of the Companies (Acceptance of Deposits by Companies)
Rules, 2014 would apply only to deposits received from directors or relative of
director. The exemption will not apply to Partnership Firm in which all the Partners
are Directors of the Company or Member of the Company.
Whether Partnership
firm can be member?
Department's Clarification.-"A
firm, not being a person cannot be registered as a member of a company except
where the company is licenced under section 25 of the Companies Act,
1956". [Circular No, 4n2, dated 9-3-1972]
'Person'
includes a company and on behalf of company as well as of any other person, an
agent duly authorised may sign. But a 'firm' as such cannot sign, as a firm is
not 'person'. If the partners of a 'firm' subscribe, they become joint holders
of the share or shares subscribed for. The Registrar will not accept the
signature of the firm as a subscriber but only if the partners individually
sign as joint subscribers. See Re, Land Credit Co. of Ireland, Weikersheim's
case, (1873) 8 Ch Appeal 83 1; Re, Glory Paper Mills Co., Dunster's case,
(1894) 3 Ch 473. Nor is a firm entitled to be registered as member in the name
of the firm but only in the names of the individual partners. Re, Vagliano
& Anthracite CDIlieries Ltd., (1910) 79 LJ Ch 769.
Partnership is merely an association
of persons for carrying on the business of partners and 'firm', is a
compendious method of describing the partners. A firm, however, is not a
person. Bacha F. Guzdar (Mrs.) v. CIT, (1955)
25 Com Cases 1 : AIR 1955 SC 74. A pooling contract is not a partnership or an
association, Madan Gopal v. Shewal Das, (1934)
4 Com Cases 339 (Lah), nor a chit fund, TP. Naidu
v. A.S. Mudaliar, AIR 1919 Low Burma 102
Whether Company can
accept loan from partnership Firm if, one or more partners are
shareholder/Director of the Company:
No,
Company can’t accept loan from a Partnership firm even if its partners are
member /director of the Company. Because Company can accept loan only from
person except Director/Member or Relative of the Director.
IV.
Loan from Non Relatives:
Company
can’t accept loan from relatives of the director as per Companies Act, 2013 But
as per ‘The Companies (Acceptance of Deposit) second amendment Rules, 2015’
dated 15th September, 2015 G.S.R. 695(E) Private Limited Company can
accept loan from the relative of the Director if relative furnish to the
company at the time of giving the money, a declaration in writing to the effect
that the amount is not being given out of funds acquired by him by borrowing or
accepting loans or deposits from others.
LIST OF PERSONS TO
WHOM COMPANY CAN ACCEPT OR CAN’T ACCEPT THE LOAN
Loans from
|
Conditions, if any:
|
|
1.)
|
Shareholder:
|
Member: Yes, can accept, but subject to the
condition specified in deposit Rules
|
2.)
|
Director/Relatives of
Director
|
Yes, can accept, but the director/relative will
give a Declaration in writing that money is not given out of borrowed funds
and company will disclose it in the Board's report.
|
3.)
|
Employee
|
Yes, can accept up to the employee’s annual
salary ( there should be a contract of employment with the company) in the
nature of non- interest bearing security deposit.
|
4.)
|
Any
other Individual
|
Can’t accept because it is prohibited by the
definition of Private Company.
|
5.)
|
Proprietorship Firm ;
|
Can’t accept because it can’t be director, Member
or relative of Director.
|
6.)
|
HUF
|
Can’t accept because it can’t be director, Member
or relative of Director.
|
7.)
|
Partnership Firm
|
Can’t accept because it can’t be director, Member
or relative of Director.
|
8.)
|
Any Company
|
Yes, can accept, but also comply with Sec 179(3) wherein
the conditions are specified for the lender
|
9.)
|
Banks
|
Yes, can accept
|
10.)
|
Trust
|
Yes, can accept, but loan received should be non-
interest bearing.
|
11.)
|
Outside India
|
Yes, can accept, but subject to the provisions of
the Foreign Exchange Management Act, 1999 and rules and regulations made
there under.
|
12.)
|
Govt. organization (
eg. SIDBI)
|
Yes, can accept
|
13.)
|
Any other Financial
Institution which are not incorporated as Banks (eg. Religare, Fullerton,
Barclays, Bajaj Finance).
Yes, can accept
|
|
OTHER SOURCES OF FUNDING FOR PRIVATE LIMITED COMPANY:
Except
sources mentioned above private Limited Company can raise funds from the
followings:
·
By issue of Debentures
·
By issue of Equity Shares
·
By issue of Preference Shares
I will
discuss the provisions of issue of debentures/equity share/ preference shares
in a separate article.
TERMS USE IN THE ARTICLE
Meaning of- ‘Relative’
The
term ‘Relative’ defined under Section 2(77) read with Rule 4 of Companies
(Specification of definitions details) Rules, 2014 of the Companies Act, 2013
Ø Members
of HUF
Ø Husband
and wife
Ø Father,
Mother,
Ø Son,
Son’s wife
Ø Daughter
Ø Daughter’s
Husband
Ø Brother
Ø Sister
Meaning of-'Person'
Meaning of word Person is not
defined under Companies Act, 1956 & Companies Act, 2013.
General
Clauses Act, 1899: The
word 'person' is not defined in this Act but in the General Clauses Act,
1899 [s. 3 (39)] as including a company or other association or body of
individuals. Notwithstanding this, it has been held that the expression
'persons' in this section means only individuals and not bodies of individuals,
Senaji Kapurchand v. Pannaji Devichand, AIR 1930 PC 300 affirming ILR 50 Mad
175. See also Akola Gin Combination v. North Cote Ginning Factory, AIR 1914 Nag
26, This confusion has been cleared by the decision of Madras High Court in Sri
Murugan Oil Industries (P.) Ltd. v. A. V Suryanarayan Chettiar, (1963) 33 Com
Cases 833 : AIR 1963 Mad 128 where it was held that in case a company enters
into a partnership, the company shall be taken as one person. There is no
reason why incorporated bodies which are legal persons and each of which
consists of more than twenty members cannot form themselves into partnerships
for carrying on joint business, provided that they are authorised by their
memorandum of association. Nor can there be any legal objection for companies
and individuals forming partnership firms for purposes of trade. For the
purposes of the next section (s. 12), the word 'person' has been held as
including companies and corporations (Cf. HALSBURY'sSLAWS OF ENGLAND, 51 (Vol.
7, Para 75, 4th Edo.)
Income
Tax Act: As per clause 2(31) of Income Tax Act, 1961
Person Include (i) an individual,(ii) a Hindu undivided
family,(iii) a company,(iv) a firm,(v) an association of
persons or a body of individuals, whether incorporated or not (vi) a
local authority, and(vii) every artificial juridical person, not falling within
any of the preceding sub-clauses. In other word the term person include the
term ‘person’ includes Individual, Hindu Undivided Families [HUFs], Association
of Persons [AOPs], Body of individuals [BOIs], Firms, LLPs, Companies, Local
authority and any artificial juridical person not covered under any of the
above.
Distinction between
Loan and Deposits:
For the Purpose of provisions of public
deposits, all borrowings are ‘deposits’ unless excluded
Ø In
V srinivas v. Saraswathi Finance Corporation (2002), It was observed, ‘While a
loan may include deposit, every loan is not a deposit.
Ø In
Sharda Talkies Firm V. Smt Madhulata Vyas AIR 1996, it was held that there is
subtle distinction between a deposit and a loan. In case of loan, the amount is
given by creditor to debtor at the request of and for requirements and dues of
the debtor under certain terms and conditions, In case of a deposit; the
depositee receives money at the instance of depositor. In case of loan, the
debtor has to request the creditor to advance certain amount for meeting his
requirements.
I.
|
Borrowings
which are excluded from the definition of Deposits?
|
i.
Amount from government and guaranteed by government.
ii.
Amount received from foreign government or foreign Bank.
iii.
Loan from Banks and
Financial Institutions.
iv.
Amount received against commercial paper.
v.
Inter corporate borrowing.
vi.
Subscription to securities and call in advance.
vii.
Amount from Directors.
viii.
Secured Bonds/debentures.
ix.
Convertible bonds/debentures.
x.
Non-interest bearing security deposit from employee.
xi.
Amount in trust.
xii.
Advance and security deposit received by company.
xiii.
Unsecured loans from promoters.
xiv.
Amount accepted by Nidhi Company.
|
|
II.
|
If
deposit in the joint name of director and other person then how it will be
treated? -
|
A
deposit in joint names of director and another person, who may or may not be director,
should be permissible, if name of director is first depositor, though there
is no specific provision.
|
|
III.
|
If
a person ceases or resign from the post of director after giving loan then
such loan will be considered as deposits or not?
|
Requirement
of director will be check at the time of receipt of amount. Thus, later he
may cease to be a director.
|
|
IV.
|
If
a person is director and shareholder of the Company and giving loan to
Company whether it will be considered as loan from Director or Member
|
As
per my understanding this should be treat as loan from the Director instead
of the
Shareholder
of the Company.
|
|
V.
|
Question:
Whether LLP can give Loan to Company under this exemption:
|
Solution:
NO, LLP can’t give loan to Private Limited Company under this Clause. Because
this clause covers only Company not Body Corporate.
|
[1]
Private Limited Companies are exempted from the provisions of Section 180(1)(c)
and 117(3)(g) w.e.f. 05th June, 2015.
[2]
The word “Company” in Section 73
includes a public Company of any size and a private Company.
[3]
Board resolution can’t be passed by Circular Resolution in case of acceptance
of loan.
[4]
Complete procedure for acceptance of Deposit from the Members are given in
article Series No. 91. If anyone want that article drop me mail on
csdiveshgoyal@gmail.com.
[5]
**But after publication of Exemption Notification on
Private Limited Companies (Dated
05.06.2015):
The above restriction will now no longer be
applicable to the Private Companies which satisfies All The 3 Conditions mentioned below:
a)
In whose share capital no other
body corporate has invested any money;
b)
If the borrowings of such a
company from banks or financial institutions or any body corporate is less than
[lower of (i) Two times of paid up share capital or (ii) Rs. 50 Crore]; and
[6]
any amount received from a person who, at the time of the receipt of the
amount, was a director of the company or a relative of the director of the
private company
[7]
any amount received from a person who, at the time of the receipt of the
amount, was a director of the company or a relative of the director of the
private company
Can a private limited company borrow loan from LLP @ rate of 9% ?
ReplyDeleteLLP is no relation with any director/shareholder/relative/employee of company.Overall there is no relation between LLP & Private Limited Company. Is there any section/clause/provision in Act that private limited company is prohibited from borrowing from LLP.
very precise and easy to understand information
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