Among numerous types of Companies in India classified in the Act, Private Limited incorporation is favoured to start a business by holding strong control over its Business. Private Ltd registration is preferred by the promoters when medium scale operations are to be covered under proposed Business without any interference of the outsider’s i.e. public at large.
Where a Private Limited Company cannot raise funds from public at large through issue of securities, the need of introducing large amount of capital may arise, for which the investors come at rescue to these companies. The requirement of external funds necessitates investment by third parties i.e. other than co-founders and their related parties.
The question here arises that why and how a third party can invest in a Private Limited Company?
In this article, we will discuss the mode of investment in a registered Pvt Ltd Company, the aspects to be considered before holding equity in a Pvt ltd company and procedure for transfer of shares held while online company registration.
First, let us know who can hold shares in a Private Limited Company?
Shares of a Private Limited Company can be issued after online company registration with Central Government, Ministry of Corporate Affairs through the online portal www.mca.gov.into any of the following persons:
- An individual/ HUF;
- Company;
- Limited Liability Partnership;
- Any other Body Corporate;
- Association of Persons; or
- Body of Individuals
Minor as shareholder in Company:
A minor can hold share in a registered Pvt Ltd Company only through his/her guardian.
Partnership firm:
A Partnership Firm cannot hold shares in its name as it does not hold a separate Legal Identity from the Partners. However, the partners can jointly hold shares in a pvt ltd company.
How to subscribe shares in a Private Limited Company?
Group of persons called promoters can together register Private Limited Company by way of subscription to Memorandum of Association (MoA) while online company registration procedure. The subscribers to MoA are shareholders of a Private Limited Company.
Where the person does not hold shares by way of subscription to MoA of Company while online registration of the company, the other way is to either subscribe to shares on further issue by a company or by transfer of shares.
Aspects to be considered before making Investment in a company!
Introduction of investor in the business can be a necessary step where the business of a company requires external fund as discussed above. However, an investor before lending the money to the company shall first go through the pros and cons of investing in the Private Limited Company.
Holding of shares in a Private company becomes advantageous to the holder due to various benefits offered by the said structure as well as the nature of the business. Focusing on the general aids to the investors, we can enlist following out of numerous aspects:
Control over operations:
The prime concern of the investors is yielding maximum profit out of the investment made in the company. The successful and profitable operations of the company are directly linked with the earning of the company. The control over operations can lead to directing the company in right path. The control over the operations will be derived in ratio of the shareholding in the company. Unlike providing fund in the form of loan & advances, shareholding will provide the control over operations and decision making of the company by availing the voting rights for the business to be transacted and conducted at Meetings of members.
Where the investors are willing to take control over day-to-day operations of the company, they may also appoint a representative in the Board of Directors called Nominee Director.
Tax Benefits:
Unlike the taxation in case of Sole Proprietors, Corporate tax will be applicable to the Private Limited Company. The expenses in connection with the business of the company are allowable as deduction under Income Tax Act as well as under Companies Act, 2013.
Further, the dividend, if any, is issued by the company to the shareholders will be tax free in the hands of the shareholders.
With regards to the taxability in case of company, you shall take advice from the consultant in order to know whether this aspect is cost-effective for investors or not.
Separation of Management:
Where the investors are not willing to involve in the day-to-day management of the company, this characteristic will help to invest in company for profit only. The shareholders of the company do not require engaging into regular business activities as the obligation for same lies over the Board of Directors of the company.
Limited Liability irrespective of Shareholding:
The risk of loss or failure of business depends on the industry in which the company operates. Where the business plan of the Registered Private Limited Company involves extreme risk, the investors are saved because of the said characteristic. Limited Liability will prevent investors’ personal assets from loss made in the company as the liability of any shareholder is only limited to the extent of unpaid amount towards subscribed share capital.
Investment for long term:
A start-up under newly registered pvt ltd company may result into losses at initial stage of the operations. Nevertheless, based on the nature and compatibility of business, the company may yield higher profit in long term. Where the risk aspect cannot be eliminated, the investment shall be made after due consideration of Business Plan of the company in order to keep the risk at marginal level.
Liquidity of Shares:
Degree of Liquidity of shares refers how quickly the shares can be converted into cash or sold in the market. The liquidity of shares in case of registered Pvt Ltd Company is very low as the transfer of shares in case of a Private Company involves a procedure to be followed as given under Companies Act. Unlike a Public Listed Company, the shares of a Private Company are not easily transferable in the open market.
Conversion in Public Company:
With enhancement of operations in any company, the conversion of Private Company into a Public Company may be a necessary step as the company may require infusing capital on large scale from the public.
On conversion and listing of shares of the company, the worth of the shares held by investors will be increased in proportion of the shareholding. At this stage, the disadvantage for a Private Limited Company of lower liquidity will also be resolved as the shares of the company will be open for trading on open market throughout the country.
Dis-investment from Private Limited Company:
Whether the proposed investment will be beneficial to the investors of the company or not is a question which involves higher consideration of facts associated. The investment can be made after the Private Limited incorporation considering the abovementioned aspects associated with any company.
If at any the investors find the investment in form of shareholding non-beneficial for themselves, they always have an option to dis-invest from the company. The shares held can be transferred nevertheless this involves a procedure to be followed as prescribed below:
Transfer of shares in a Private Limited Company:
The Indian Companies Act, 2013 prescribes restriction on transfer of shares to be included in the Articles of Association (AoA) to register Private Limited Company.
- The transfer of the shares requires entering into share transfer deed by furnishing all details of the transferor and transferee along with share certificate numbers.
- Where a shareholder of a Private Limited Company is willing to transfer the shares, the shares shall first be offered to the existing shareholders of the Private Company.
- When the existing shareholders do not opt to buy the offered shares, the transferor may now offer the shares to outsiders.
- The Application and Share Transfer Deed shall be furnished to the company for its consideration, approval and records.
- Upon receipt of the application, the Board of Directors (BoD) shall take the application in record and accept the said transfer considering the best of the Private Company.
- The Board of Directors of the company shall communicate the acceptance for the said transfer of shares from transferor and transferee.
- Where the said acceptance of transfer is not communicated within prescribed time, the application shall be deemed to be accepted.
Conclusion:
The decision to invest in a company especially a Private Limited Company is ultimately based on the willingness of the investors. A rational thinking procedure shall be adopted before indulging in any project, for which consultation from a professional shall be taken for considering the financial aspects and all allied perspectives.
The Author of the Article is co-founder of India's leading online Legal Service Provider, LegalWiz.in. He can also be reached at support@legalwiz.in for Incorporation of Private Limited Company other personalised solutions.
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