CONNECTING THE DOTS: EASE OF ENTRY Or LIQUIDTY VS EASE OF ENTRY & LIQUIDITY
A business is set to become successful when there is a synergy between the entrepreneurial skills and the capital. Since different businesses run on different models, the manner and method of capital collection also varies. However, from an investor's point of view, ease of investing and ease of liquidity is perhaps the most sought after junction. Below, we will explore few modalities of privately raising capital in a private limited company i.e. the business vehicle of choice for both entrepreneurs and the investors.
1. EQUITY ROUTE: No, it’s not as
easy as receive money, issue shares and forget. When it comes to raising
capital, the entrepreneur will have to walk a quite in convincing the investors
that if their money remains locked-in for a given years, the entrepreneur will
be able to make it attractive for the investor to liquidate with expected
returns. The risk in this route is large and inherent for both the investor as
well as the entrepreneurs. For investors, the biggest risk is liquidity. Being
unlisted companies,
they will have to stay invested for a given time and quality of exit will
depend on the performance of the entrepreneur and the market overall. If
everything goes as per expectation, third party buyers will wait in queue to
bite the share, if not, then most common scene will be suspicious faces trying
to take a ride at lowest possible valuation or even liquidation. But for an entrepreneur, the
situation is grimmer with his/her potential to manage the show will
immediately call for question in a small yet connected world.
2. DEBT ROUTE (TERM LOAN): Term loans are often offered in the
form of packages for which the borrower company has less flexibility.
3. DEBT ROUTE (DEBENTURE): Perhaps
the best in class as it allows the borrower the flexibility to structure the
instrument including maturity, interest rate etc. Other major advantages of
debenture route are private placement and listing them in exchanges.
DON’T FORGET THAT ITS THE ENTREPRENEUR AND HIS/HER TEAM WHO WILL PLAY THE KEY ROLE FOR
BUSINESS. COMPANY IS JUST A “STAMP”.
EASE OF INVESTMENT AND EASE OF LIQUIDITY
Easy investing and easy
liquidation are perhaps the most powerful parallel driving forces in any investment transaction. While the
former allows one to time the investment, the later allows to either make
profit or prevent loss. With India giving boost to start-ups, early
growth capital will be of high demand. With technology solutions set to dominate
the future, potential of a good ROI is also quite high. In a scenario like this, private placement and
debt listing perhaps will balance it out well.
PRIVATE PLACEMENT OF DEBT: THE PROCESS
Private placement??? It’s
certainly not a job placement and has nothing to do with any human recruitment.
Once can still say that it’s a process where an entrepreneur recruits financial
capital into his/her company. To put it simply, private placement is a
privately/confidentially arranged affairs to raise debt/equity fund/capital for
a company.
A private limited company cannot
request (in any manner) the public at large to provide capital and hence the
alternative method is private placement. Private placement is backed by
Companies Act, 2013 read with Companies (Prospectus and Allotment of
Securities) Rules, 2014. The process allows an entrepreneur to solicit and
receive pre-determined/pre-negotiated funds by following few simplified statutory steps.
A private placement can be best understood by the following illustration.
Assuming that there is a private
limited company ABC Solar Private Limited (“Company”) where X (an
experienced engineer) is the managing director and his wife Y is another director (just for
statutory sake!!). The entire share capital of the Company is funded by personal
savings of X and Y where X is 99% shareholder and Y
is 1% shareholder. The Company has about 10 employees and is engaged in
consultancy and services related to installation and maintenance of rooftop
solar system. However, X has the
required technical knowledge and ideas for manufacturing of small solar
inverters and to start the operations 10 crores required which X and Y unable to fund from their personal savings. X
prepares a detailed project report regarding the proposed manufacturing of solar inverters and
discusses the same with L, M and N who are high net-worth individuals and willing to try their luck.
1. So
the process starts with designing the debentures. Designing doesn’t mean
finalizing the look and feel of the debenture certificate formats. Designing
means calculating the number of debentures the Company will have to issue, the
interest payable, the repayment terms etc. According to Companies (Prospectus
and Allotment of Securities) Rules, 2014, the face value (paper value/basic value) of such
debentures should not be less than Rs. 20,000. Let’s assume that all three L, M
and N are willing to fund the
Company and it’s decided that Company will issue 5,000 debentures of Rs. 20,000/- (Rupees Twenty Thousand only) each with an interest rate of 10% p.a. It was
agreed that L will buy 1500, M will buy 1000 and N will buy 2500 debentures.
2. In
the next step, the Company will have to convene a board meeting to approve the
proposal of raising specified capital through private placement of debentures.
Since both X and Y are the only directors of the
Company, this will be pretty straight forward.
3. Once
the proposal is passed at board level, this will have to be passed at
shareholders’ level by way of a special resolution. Since both X and Y are the only shareholders of the Company, this will be pretty
straight forward.
4. Once
the private placement is authorised at board and shareholders’ level, the
immediate next step is to do the following activities (i) preparing invitation letters for L, M and N and maintaining their records in a
specified format; (ii) preparing stock – exchange listing application
and obtaining in-principle listing approval; (iii) arrange credit rating of the Company by a rating agency
registered with SEBI; (iv) enter
into an agreement with one SEBI registered depository participant so that the
issued debentures are in dematerialized form; (v) an information memorandum containing various financial and
operational information about the Company and the issue of debentures[5].
5. Once
records are maintained, then it’s time to send the invitations separately and
privately to L, M and N and register the
details and offer letter with the Registrar of Companies (“ROC”).
6. As
already agreed, on the given date L, M and N will submit their application form and transfer the respective
amount to Company’s bank account on the given date. Normally, the allotment is
deemed on the issue closing date itself else the Company will have to complete
allotment within 60 (Sixty) days from receiving application money. Once allotment is completed, the letter of
allotment needs to be sent to the securities demat account of L, M
and N.
7. Now
the Company will have to proceed for final listing of the debentures by
submitting an application to the stock exchange and submit a return of
allotment to the ROC. Since the Company has already received in-principle
listing approval, final listing will not be difficult.
8. Once
listing is completed, the debentures can be freely traded by L, M
and N.
TRADING ADVANTAGES: The biggest disadvantage for any
investment into a private limited company is transferability and liquidity.
From investor’s perspective, they will have to remain invested unless they find
a suitable buyer and the transaction is approved by board off course subject to
overall industry or market condition. So, unless the investor has both buyer
and board in to confidence, it will not be an easy liquidity scenario.
Contrary to that when securities are listed then the investor does not need the confidence of board to have liquidity. Willing buyer and willing seller, that’s it, transaction is completed in accordance with the exchange rules through demat and bank accounts.
So in a falling interest rate scenario L, M and N can sell the debentures to third parties and gain substantially through capital appreciation.
IF YOU ARE A SOLAR ENTREPRENEUR
AND YOU ARE LOOKING TO RAISE CAPITAL IN THIS MANNER, PLEASE CONTACT GREEINVENTIO LEGAL BY LEAVING A COMMENT THERE ALONG WITH YOUR CONTACT DETAILS, OUR
ASSOCIATED LAW FIRMS WILL CONTACT AND HANDHOLD YOU.