Every company needs additional capital for its business from time to time. The company can meet such requirement of capital, to an extent, by the issue of share, and at times has to raise loans. Borrowing can be defined as a means through which companies arrange financial funds through external sources like bank loans, shareholders, public investment, etc. The manner to borrow money, from whom it can borrow, to the extent it can borrow and compliances to be done by a company is regulated by various provisions of Companies Act, 2013 (“Act”).
In this article, we have attempted to briefly analyze the various provisions under Act that governs borrowings by private companies.
2. BORROWINGS BY PRIVATE COMPANIES:
As per Section 179(3) of the Act the Board of Directors of a company by means of a resolution passed at its meeting have a power to borrow monies. A private company can borrow money by followings means:
a. Borrowings in the form of Exempted Deposits;
b. Issue of Debentures pursuant to section 71 of the Act;
c. Issue of Deposits pursuant to section 73 of the Act.
A.Borrowings in the form of Exempted Deposits:
- 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 or 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 Governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 (42 of 1999) and rules and regulations made there under;
- 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, 1970 (5 of 1970) or in clause (b) of section (2) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) , 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)
- Any amount received as a loan or financial assistance from Public Financial Institutions notified by the Central Government in this behalf in consultation with the Reserve Bank of India or any regional financial institutions or Insurance Companies or Scheduled Banks as defined in the Reserve Bank of India Act, 1934 (2 of 1934)
- Any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines or notification issued by the Reserve Bank of India;
- Any amount received by a company from any other company;
- 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:Provided that a declaration in writing is furnished to the company at the time of giving the money 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 and the company shall disclose the details of money so accepted in the Board’s report.
- Any amount received from an 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;
- Any non-interest bearing amount received and held in trust;
- Any amount received by the company under any collective investment scheme in compliance with regulations framed by the Securities and Exchange Board of India;
- Any amount received by a company from Alternate Investment Funds, Domestic Venture Capital Funds, “Infrastructure Investment Trusts”, Real Estate Investment Trusts and Mutual Funds registered with the Securities and Exchange Board of India in accordance with regulations made by it.
ISSUE OF CONVERTIBLE NOTES BY STARTUP COMPANIES:
A start-up company can issue convertible notes (convertible into equity shares or repayable within a period not exceeding ten years) upto an amount of twenty-five lakh rupees or more received by from the date of issue in a single tranche, from a person.
- “Start-up Company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognized as such in accordance with notification number G.S.R. 127 (E), dated the 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade];
- “Convertible Note” means an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument.
B. ISSUE OF DEBENTURES PURSUANT TO SECTION 71 OF THE ACT:
Debentures include debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. Section 71 of the Act and rule 18 of Companies (Share Capital & Debenture) Rules, 2014 deals with the provisions relating to the issuance of Debentures.
- Debentures cannot be issued with voting rights.
- The company issuing redeemable debentures shall create a debenture redemption reserve account out of the profits of the company available for payment of dividend.
- Company to appoint one or more debenture trustees if the offer is made to members exceeding 500 for subscription of debentures.
- A private company can issue unsecured non-convertible debenture, listed on a recognized stock exchange.
- Secured debentures can be issued up to a maximum redemption period of ten years from the date of issue otherwise would be considered as deposits. In the case of a company engaged in the setting up of infrastructure projects such period of redemption may exceed a period of ten years but cannot exceed thirty years.
- A company may issue debentures at zero coupon interest rate in accordance with the terms and conditions of their issue.
- A company may by passing a special resolution, issue optionally convertible debentures into shares either wholly or partly.
- The optionally convertible debentures and non-convertible debentures issued without creating a charge on the assets of the Company will be treated as Deposits and have to comply with the provisions of Section 73 of the Act and rules made thereunder.
Deposit includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India. A private company can take loans in the form of deposits from its Members subject to following conditions. However, a private company cannot issue deposits to public.
A private company can with the approval of members, borrow monies from its Members on following terms and conditions:
- May borrow money for a period not less than six months and not more than 36 months. Provided that the company may, for its short term requirements may borrow money for a period less than six months but not less than 3 months and the amount so borrowed shall not exceed ten per cent. of the aggregate of the paid-up share capital, free reserves and securities premium account of the company.
- The amount so borrowed shall not exceed 100% of aggregate of the paid up share capital, free reserves and securities premium account.
- Shall file the details of monies so accepted in form DPT-03.
- Company shall not borrow money at a rate of interest exceeding the maximum rate of interest prescribed by the Reserve Bank of India for acceptance of deposits by non-banking financial companies.
Exemption: The maximum limit for borrowing monies from members shall not apply to the following classes of private companies, namely:
- A private company which is a start-up, for ten years from the date of its incorporation.
- A private company which fulfils all of the following conditions, namely:
- which is not an associate or a subsidiary company of any other company,
- the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is less.
- such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under section 73.
Borrowings are an essential part of Companies. The option of borrowings depends on the need of the companies and the nature of borrowings. Any irregular and irresponsible act may result in the insolvency of the company which may cause considerable losses to them. So to facilitate the smooth functioning of the company and protect the interests of shareholders, a company has to comply with various compliances under the Companies Act, 2013.
Author: Prashant Jain, Co-Founder & Partner, Prajakta V Ghokale, Associate and Nisha Jhawar, Associate.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at firstname.lastname@example.org,email@example.com,firstname.lastname@example.org.