Investment option as a share application / share investment vs convetible debentures

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r venkatesan (Querist)
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07 January 2023 Sir a proposal for investment in another state private limited entity is planned, Investor is in one state and the investee is in another state, Investee has no tangible assets for security. Either way, short-term operation will be an accumulation of losses since the project will generate revenue after six months only, with gradually the income increasing over the years, and profit is estimated from year 1 end only. Under the circumstances, a.is the option of keeping the funds as share application money say for a period of one or two years, and then if revenue and profit starts flowing, can it be converted into equity, b, till conversion, is the fund a liability or part of the capital, c, will the losses during this period will impact the investor d. alternatively will convertible debenture route will be better even though, if there are losses, there is no recourse to recover the debt in any manner, awaiting your guidance, with regards Venkat bashyam 9944446349 ssv associaties@gmail.com

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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09 July 2024 Based on the scenario described, here are insights and considerations for the investment proposal in the private limited entity located in another state:

### Option 1: Share Application Money

1. **Nature of Share Application Money:**
- Share application money represents funds received by a company pending allotment of shares.
- It is recorded as a liability in the books of the company until shares are actually allotted.

2. **Duration of Share Application Money:**
- Share application money can be kept for a period of one or two years as proposed.
- During this period, it remains a liability on the books of the investee company.

3. **Conversion to Equity:**
- Once the investee company starts generating revenue and profits, the share application money can be converted into equity shares.
- Conversion will require compliance with regulatory requirements and approval from the board and shareholders.

### Option 2: Convertible Debentures

1. **Nature of Convertible Debentures:**
- Convertible debentures are debt instruments that can be converted into equity shares at a later date.
- They provide a fixed return until conversion but do not offer security on tangible assets.

2. **Recourse in Case of Losses:**
- If the investee company incurs losses, there is no recourse to recover the debt component of convertible debentures.
- Investors bear the risk of loss until conversion into equity.

### Considerations:

1. **Impact of Losses:**
- Regardless of whether funds are held as share application money or invested through convertible debentures, losses incurred by the investee company will affect the financial health and potential returns for the investor.
- Share application money as well as convertible debentures reflect liabilities until converted into equity or repaid, respectively.

2. **Legal and Regulatory Compliance:**
- Both options (share application money and convertible debentures) require compliance with Companies Act provisions and other applicable laws.
- The process of conversion and redemption needs to be carefully planned and executed to avoid regulatory issues.

3. **Long-Term Strategy:**
- Consider the long-term strategy and financial viability of the investee company before making the investment.
- Assess the business plan, revenue projections, and growth prospects to evaluate the potential for future profitability and return on investment.

### Conclusion:

- **Share Application Money vs. Convertible Debentures:** Each option (share application money or convertible debentures) has its advantages and risks. Share application money offers flexibility in conversion timing but remains a liability until converted. Convertible debentures provide a fixed return and potential equity upside but carry the risk of loss in case of company failure.

- **Consultation:** It is advisable to consult with a financial advisor or legal expert who can provide tailored advice based on your specific circumstances and ensure compliance with relevant laws and regulations.

- **Decision:** Your decision should be based on a thorough evaluation of the investee company's financial health, business prospects, and the investor's risk tolerance and investment objectives.

If you need further assistance or detailed guidance on specific aspects of this investment proposal, consider reaching out to a professional advisor who can provide personalized advice based on your situation.