Raising of Funds - Private Funding: formula sheet

Key formulas

Private company limits (Companies Act, 2013, s. 2(68))

Restricts share transfer + max 200 members (except OPC) + bars public invitation

Joint holders count as one member. Employees and ex-employees who remain members are not counted.

Prospectus test (s. 2(70))

Document inviting offers from the public = prospectus

Private funding avoids a public invitation, so it avoids a prospectus.

Stage-to-source map

Idea → promoters, family, angels | Growth → VC | Mature/expansion → PE | Asset-backed needs → banks, NBFCs

A guide for matching sources, not a legal rule. Overlaps are common.

Ownership after equity funding

Investor % = Investment ÷ Post-money valuation; Post-money = Pre-money + Investment

Use to compute dilution of promoters.

Person limit

Identified persons ≤ 50 (or higher number prescribed) in a financial year

Excludes qualified institutional buyers and employees under an ESOP scheme (Section 62(1)(b)). Breach means deemed public offer.

Allotment time limit

Allot within 60 days from receipt of application money

Otherwise repay within 15 days after the 60 days end.

Refund interest

12% per annum from the expiry of the 60th day

Applies if repayment is not made within the 15 days.

Return of allotment

File with Registrar within 15 days of allotment

Must include a complete list of allottees with names, addresses and number of securities allotted.

Default in filing the return

Penalty ₹1,000 per day of default, maximum ₹25 lakh

Company, promoters and directors are liable.

Penalty for contravention

Lower of amount raised and ₹2 crore

Company must also refund all monies with interest within 30 days of the penalty order.

Payment mode

Cheque, demand draft or other banking channel; never cash

Money stays in a separate bank account in a scheduled bank until allotment and return are done.

Fresh offer rule

No fresh offer until earlier allotments are complete, or the earlier offer is withdrawn or abandoned

More than one issue is allowed to a prescribed class of identified persons, within the overall person limit.

Number of identified persons (s.42(2))

Identified persons ≤ 50, or such higher number as prescribed, in a financial year

QIBs and employees under an ESOP scheme (s.62(1)(b)) are excluded from the count. Check the prescribed higher limit in the rules for your answer.

Mode of payment (s.42(4))

Subscription money by cheque, demand draft or other banking channel; not by cash

Applies to every identified person.

Time to allot (s.42(6))

Allot within 60 days of receipt of application money

If not allotted, repay within 15 days after the 60 days expire.

Interest on delay in repayment (s.42(6))

12% per annum from the expiry of the 60th day

Payable if repayment is not made within the 15 days.

Return of allotment (s.42(8))

File with the Registrar within 15 days of allotment

Include a complete list of allottees with names, addresses and number of securities. Money cannot be used until allotment is made and the return is filed.

Penalty for late return (s.42(9))

₹1,000 per day of default, maximum ₹25,00,000

Company, promoters and directors are liable.

Penalty for contravention (s.42(10))

Lower of amount raised or ₹2,00,00,000

Company must also refund money with interest within 30 days of the penalty order.

Private placement: number of persons

Offer to identified persons ≤ 50 (or higher prescribed number) in a financial year, excluding qualified institutional buyers and ESOP employees

Section 42(2). Offer to more than the prescribed number is deemed a public offer under Explanation III and sub-section (11).

Mode of payment

Subscription money by cheque, demand draft or other banking channel, not cash

Section 42(4). Money cannot be used until allotment is made and the return of allotment is filed.

Time to allot and refund

Allot within 60 days of receipt of application money; if not, refund within 15 days after the 60 days expire; else interest at 12% p.a. from day 60

Section 42(6). Keep application money in a separate bank account in a scheduled bank.

Return of allotment

File return with Registrar within 15 days of allotment, with the full list of allottees

Section 42(8). Late filing penalty under 42(9): ₹1,000 per day of default, capped at ₹25 lakh.

No public advertisement

No public advertisement or media, marketing or distribution channels to inform the public at large

Section 42(7). Startups pitching to investors must not publicly advertise the issue.

Investor return multiple

Multiple = Exit proceeds ÷ Amount invested

A practical measure of return. Ignores time, so also mention IRR if the question gives years.

Post-money valuation

Post-money valuation = Pre-money valuation + New investment; Investor stake % = Investment ÷ Post-money valuation × 100

Used to compute the equity an investor receives in a round.

Section 186(2) investment and loan limit

Limit = higher of (60% × (paid-up share capital + free reserves + securities premium)) or (100% × (free reserves + securities premium))

Covers loans, guarantees, security and acquisition of securities in other bodies corporate. Beyond this limit, a special resolution in general meeting is needed under Section 186(3).

Board approval for loans and investments

Board resolution with the consent of all directors present at the meeting (Section 186(5))

Prior approval of the public financial institution is also needed where a term loan is subsisting, unless the proviso conditions are met.

Minimum interest on loans given

Rate ≥ prevailing yield of the 1, 3, 5 or 10 year Government Security closest to the loan tenor (Section 186(7))

Applies to loans your company gives, not loans it takes.

Loans to directors (Section 185)

Loan to a director or relative: prohibited. Loan to a person in whom a director is interested: special resolution plus use for principal business activities

Exemptions include loans from a holding company to its wholly owned subsidiary, if used for the subsidiary's principal business.

Penalty under Section 186(13)

Company: fine ₹25,000 to ₹5,00,000. Officer in default: up to 2 years' imprisonment and fine ₹25,000 to ₹1,00,000

Section 185(4) is harsher: company fine ₹5,00,000 to ₹25,00,000.

Board's ceiling under Section 181

Limit = 5% × (Net profit of year 1 + year 2 + year 3) ÷ 3

Years are the three immediately preceding financial years. Contributions above this limit in a financial year need prior approval of the company in general meeting.

Rule for approval

Aggregate contributions in a financial year ≤ limit → Board can decide; > limit → prior permission in general meeting

The proviso refers to the aggregate in any financial year that exceeds the limit. Contributions equal to the limit do not exceed it.

Section 135 CSR minimum spend (for comparison)

CSR spend ≥ 2% × average net profits of the three immediately preceding financial years

Applies only to companies covered by Section 135(1). Net profit is calculated under Section 198, with sums as prescribed excluded.

Section 183 exception

Contributions to National Defence Fund or Central Government-approved defence fund: no Section 181 limit

The company must disclose the total in its profit and loss account.

Quick revision

• Private placement is an offer to a select group of identified persons, not a public offer.
• Identified persons are chosen by the Board and must not exceed fifty, or a higher prescribed number, in a financial year.
• Qualified institutional buyers and employees under an ESOP are excluded from that count.
• The offer and application carry no right of renunciation.
• Subscription money must come by cheque, demand draft or other banking channel, never cash.
• Allot within sixty days of receiving application money, or refund within fifteen days after that.
• Late refund carries interest at 12% per annum from the expiry of the sixtieth day.
• Application money stays in a separate account in a scheduled bank until allotment.
• File the return of allotment with the Registrar within fifteen days of allotment.
• No public advertisement or media may be used to publicise a private placement.
• A placement breaching the limit on identified persons is deemed a public offer.
• Section 181: above 5% of the average net profits of the three preceding years, prior general meeting permission is required.

Common mistakes

• Calling any unlisted company's funding private funding without checking whether the public was invited. Fix: Test the method: select investors and no public invitation. A public company can also raise funds privately.
• Treating venture capital and private equity as identical. Fix: Say VC backs early, high-growth, high-risk businesses; PE usually backs more mature companies with larger sums, including buyouts.
• Counting every offeree, including QIBs and ESOP employees, towards the limit. Fix: Always write: fifty excluding qualified institutional buyers and employees under an ESOP scheme, or such higher number as prescribed.
• Saying a breach of the person limit only attracts the sub-section (10) penalty. Fix: Sub-section (11) overrides (9) and (10): an issue not complying with the person limit is deemed a public offer, and the Companies Act, SCRA and SEBI Act apply.
• Saying a QIP can be made by any company. Fix: State that QIP is only for listed companies and only to QIBs.
• Counting QIBs and ESOP employees in the limit of 50. Fix: Count only the other identified persons. Write the exclusion explicitly in your answer.
• Treating venture capital and private equity as the same thing. Fix: Compare on stage, ticket size, stake and risk. VC backs young high-growth firms for minority stakes. PE usually backs mature firms, often with larger or controlling stakes.
• Saying angel investors are institutions or funds. Fix: Angels are usually individuals investing their own money, early, in small amounts, often with mentoring.
• Applying Section 186 limits to money the company borrows Fix: Section 186 limits loans given, guarantees, security and investments made by the company, not its borrowings.
• Taking the lower figure when computing the Section 186(2) limit Fix: Compute both 60% of capital plus reserves and 100% of free reserves and premium, and take the higher.

Exam tips

• Open with a definition and a contrast with public funding; many questions are short notes built on this.
• Quote s. 2(68) and s. 2(70) only as given: private company features and the meaning of prospectus.
• In case questions, name the company's stage before naming the source.
• Always add investor return and control rights, which carry marks as analysis.
• Link to private placement and preferential allotment in the conclusion for a complete answer.
• Write the structure: provision, facts, conclusion. Cite Section 42 and the sub-section for each point.
• In date questions, show the day count and name the trigger for each period.
• Always link person-limit breach to sub-section (11), deemed public offer. It is the most tested consequence.