Strategic Management and Corporate Finance · Raising of Funds - Private Funding

Term Loans and Debt Privately Raised: Features and Security

Updated 11 October 2026 · Fact-checked

Privately raised debt is borrowing from a limited set of lenders, not the public. It includes term loans from banks and financial institutions and privately placed debentures. Both carry a fixed repayment schedule, interest and usually security. Answer by stating the instrument, its features, security, approvals and compliance, then conclude.

Understand Term Loans and Debt Privately Raised

A company needs long-term money for plant, expansion or working capital. One route is debt: you borrow, pay interest and repay the principal. When you borrow from chosen lenders and not by inviting the public, the debt is privately raised.

A term loan is a loan from a bank or financial institution for a fixed period, with a set repayment schedule. It is usually secured by a charge on the company's assets. The lender sets conditions called covenants, such as limits on further borrowing or dividend payment. Term loans suit project finance because repayment can match the project's cash flows.

A privately placed debenture is a debt instrument offered to a select group of investors, such as institutions or mutual funds, not the general public. Debentures can be secured or unsecured, and convertible or non-convertible. Private placement is faster and cheaper than a public issue, but the investor base is narrower.

The main difference: a term loan is a bilateral contract negotiated with one lender or a consortium, and it is generally not freely tradable. A debenture is a security issued to investors, often listed and transferable, and managed through a debenture trustee. Term loans give flexibility in terms; debentures give access to wider investors and market pricing.

The Companies Act also limits what a company may lend and invest. Sections 185 and 186 matter when your company is the lender, for example when it gives loans or guarantees to group companies. In answers, keep borrowing (your company as borrower) separate from lending (your company as lender).

Key rules to remember

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.

How to solve Term Loans and Debt Privately Raised questions

Use this order for any case on privately raised debt.

1Identify the instrument: term loan, secured or unsecured debenture, convertible or non-convertible.
2State its features: tenure, interest, repayment schedule, covenants, tradability.
3State the security: charge on assets, mortgage or hypothecation, and the need to register the charge.
4Check the authority to borrow: Articles, Board resolution and any shareholder approval needed.
5Check procedure for private placement: offer to a limited set of identified investors, trustee for debentures where applicable, and filings.
6If the company also lends or gives guarantees, test Sections 185 and 186 with the numbers given.
7Apply the facts, then give a clear conclusion with the compliance steps.

Quickest way: Four-line answer frame

When to use it: When a short case question asks what the company can do or must do.

Name the instrument and one line on why it fits.
List security and approvals.
List filings and records.
Conclude in one sentence on whether the proposal is valid.

Common mistakes in Term Loans and Debt Privately Raised

Applying Section 186 limits to money the company borrows
Students link Section 186 with any loan.
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
Students stop after the 60% calculation.
Fix: Compute both 60% of capital plus reserves and 100% of free reserves and premium, and take the higher.
Treating all loans to a director-linked company as banned
Confusing Section 185(1) with 185(2).
Fix: Loans to a director or relative are barred. Loans to an entity in which a director is interested need a special resolution and use for principal business.
Saying a debenture and a term loan are the same
Both are debt with interest.
Fix: A debenture is a security with investors and usually a trustee. A term loan is a contract with a lender.
Ignoring the wholly owned subsidiary exemptions
Students forget the provisos.
Fix: Section 185(3)(c) and the Section 186(3) proviso give relief for loans, guarantees or security to wholly owned subsidiaries. Still mention disclosure.
Forgetting the interest floor on loans given
Focus stays on the limit.
Fix: Check Section 186(7): interest not below the relevant Government Security yield.

Worked examples

Example 1

Aarav Textiles Ltd has paid-up share capital of ₹50,00,000, free reserves of ₹30,00,000 and securities premium of ₹20,00,000. It already has loans, guarantees and investments in other bodies corporate of ₹40,00,000 and proposes a further loan of ₹70,00,000 to an unrelated company. Is a special resolution needed?

Show the solution

Sum of capital, free reserves and securities premium = 50,00,000 + 30,00,000 + 20,00,000 = ₹1,00,00,000.
60% of this = ₹60,00,000.
Free reserves plus securities premium = 30,00,000 + 20,00,000 = ₹50,00,000. 100% of this = ₹50,00,000.
Limit is the higher: ₹60,00,000.
Aggregate after the proposed loan = 40,00,000 + 70,00,000 = ₹1,10,00,000, which exceeds ₹60,00,000.
Under Section 186(3), the exceeding transaction needs prior authorisation by a special resolution in general meeting, besides the Board resolution under Section 186(5).

Answer: Yes. The limit is ₹60,00,000 and the aggregate would be ₹1,10,00,000, so a special resolution is needed.

Example 2

Kaveri Industries Ltd wants to raise ₹5 crore by privately placed secured debentures and also take a term loan from a bank. Explain how the two differ and what security and approvals apply.

Show the solution

Debentures are securities offered to a select group of investors by private placement. A term loan is a contract with a bank for a fixed term.
Both are repaid with interest on a schedule. Debentures may be listed and transferable. A term loan is not generally traded.
Security: secured debentures and a typical term loan are backed by a charge on the company's assets. The charge must be created and registered.
Authority: check that the Articles permit borrowing. The Board approves the borrowing and the terms.
For debentures, appoint a debenture trustee where required, issue to identified investors and keep the required records and filings.
For the term loan, expect covenants, such as limits on further borrowing, and comply with them.

Answer: Debentures are tradable securities placed with chosen investors, usually with a trustee. The term loan is a negotiated bank contract. Both need Articles' authority, Board approval and a registered charge on the assets given as security.

Exam tips

Draw the debenture versus term loan contrast in a few crisp points; examiners often ask it directly.
In numerical questions, show both limbs of the Section 186(2) test before choosing the higher.
Separate borrowing questions from lending questions and say which one you are answering.
Cite sections 185 and 186 only for the points above, and conclude every case in one clear line.

Practice questions from Raising of Funds - Private Funding

Term Loans and Debt Privately Raised: frequently asked questions

What is the difference between a term loan and a debenture?

A term loan is a negotiated loan from a bank or financial institution, usually not tradable. A debenture is a debt security issued to investors and can be listed and transferred. Debentures often involve a debenture trustee.

Does Section 186 limit how much a company can borrow?

No. Section 186 limits loans given, guarantees, security provided and securities acquired by the company. Borrowing is governed by the Articles and the other provisions on borrowing powers.

Can a company lend to a director under Section 185?

Section 185(1) bars loans to a director or relative, or guarantees for their loans. Section 185(3) gives exemptions, such as loans to a managing or whole-time director under service conditions applicable to all employees.

Why choose private placement of debentures over a public issue?

It is usually quicker and cheaper because it targets a limited set of investors. The trade-off is a narrower investor base and less public visibility.