Laws On How To Raise Money For A Business

27 Jun 2022 | Business & Strategy, Finance

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Hooshang Bakht

Brego Business was started with a mission to make entrepreneurship easy. Our goal is to help business owners grow and scale without having to deal with the day-to-day stress of running a business. We specialize in providing services that help business owners grow their businesses, including Digital Marketing, search engine marketing (SEM), social media marketing (SMM), LinkedIn marketing, video production, accounts receivable (AR), accounts payable (AP), internal audit, VCFO, and recruitment. We have helped more than 500 brands grow their businesses. We work closely with clients to understand their unique needs and develop customized strategies that deliver measurable results.

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Raise Money for a business

Are You Looking To Raise Funding?

Got that investor to sign up and bite? Congratulations! There are a few to do’s you still have to mark off your list before you can start using these funds to fuel your ambitions.

We thought we would spend a little time going over the various Laws On How To Raise Money For A Business. Some of this may be a little tedious but it should serve as a great way for you to familiarise yourself with the law and the processes followed.

A) Private Placement (Section 42 of the Companies Ac, 2013, Rule 14)

B) Preferential allotment/Preferential offer

C) Right Issueā

D) Conversion of Loan/Debentures into shares.

E) Bonus issue

A. Private Placement (Section 42 Of The Companies Act, 2013, Rule 14) 

The term Private placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of the public offer) through the issue of a private placement offer letter and which satisfies the conditions specified in section 42.

Conditions Under Section 42 Are:

1) Private Placement should be done through offer letter (PAS-4).

2) A private placement offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the names of such persons in accordance with sub-section (7) of section 42 of the Act.

3) The offer shall not be less than Rs. 20,000/- per subscriber of the face value of shares.

4) Subscriber should have a separate bank account from where the subscription should be made.

5) The Private Placement offer should be made only after passing a special resolution by the shareholders.

6) The price of the private placement should be determined:

a) The explanatory statement annexed to the notice for the general meeting should define the basis or justification for the price (including premium, if any) at which the offer or invitation is being made shall be disclosed.

7)  No fresh offer or invitation shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or withdrawn or abandoned by the company – Section 42(3).

8)  Company shall allow its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allow the securities within that period, it shall repay the application money to the subscribers within fifteen days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve percent per annum from the expiry of the sixtieth day – Section 42(6).

9) A return of allotment of securities under section 42 shall be filed with the ROC within thirty days of allotment in Form PAS-3. (Like Form-2 of the Old Act)

10)  Contravention of Section 42 of the Act attracts a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty Section 42(10).

This is one the most important Laws On How To Raise Money For A Business.

B. The Issue Of Shares On Preferential Basis

A company may, if authorized by a special resolution passed in a general meeting, issue shares in any manner whatsoever including by way of a preferential offer, to any person(s) whether or not those persons include the persons referred to in clause (a) or clause (b) of sub-section (1) of section 62 (i.e existing shareholders or employees of the Company).

Such issue on preferential basis should also comply with conditions laid down in section 42 of the Act (private placement). A valuation report of registered valuer determining the price of shares is also mandatory.

  • Preferential issue – an offer of shares by a Company to a select person or a group of persons on a preferential basis but does not include the offering of shares through a rights issue, public issue, ESOP, bonus issue etc.
  • The issue of shares on preferential basis should be authorized by the articles of association of the company.
  • The issue should be made fully paid up at the time of allotment only.
  • The explanatory statement should disclose the necessary facts about the allotment.
  • Preferential allotment should be made/complete within 12 months of a special resolution.
  • Valuation to be determined by registered valuer.

C. Rights Issue Of Shares

As per section 62 of the Act Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered—

  • to its existing shareholders (OR needs to be passed, if provision there in the AOA)
  • to employees under a scheme of employees’ stock option, subject to a special resolution passed by the company.
  • to any persons, if it is authorized by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer.
  • Letter of offer for a right issue of shares needs to be made and given to existing shareholders for making Right Issue of shares.
  • Shareholders will be given 15-30 days for accepting the right issue of shares from the date of the offer letter.

This is one the most important Laws On How To Raise Money For A Business.

D. Conversion Of Loans Or Debentures Into Shares

A private company may convert loans raised by the company or debentures issued by the company into shares by passing of special resolution if there is such a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company – Section 62(3).

E. Bonus Issue


1)  Must be authorized by the articles otherwise the articles need to be amended.

2)  Resolution in the general meeting needs to be passed.

3) The Company has not defaulted in repayment of the statutory dues, Fixed deposits or debt securities.

4) All shares must be made fully paid up before making bonus issues.

Note: Once a Bonus issue is announced, it cannot be withdrawn.

This is one the most important Laws On How To Raise Money For A Business.

Hope you find the above information in order.

Written By,

Brego Business Team

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