How Can A Third-Party Invest In a Private Limited Company?

In India, most upcoming entrepreneurs opt to start a private limited company rather than any other type of company. This is because it has many advantages, such as the operations of the company can be closely held by them as well as the fact that the liability arising from the company itself is limited in nature.

The drawback of a private limited company, however, is the fact that the company cannot offer its shares to the public, therefore, barring it from raising investment capital from the general public.

How To Invest In a Private Limited Company

As mentioned earlier, a private company cannot offer up shares to the public to raise capital for itself. This is only allowed for public companies. Instead, to raise capital for the business, they can only take investments from the members of the company, family and friends. Therefore capital has to be raised via private arrangements.
Therefore to invest in a private limited company, one must personally approach the members of the company. There are three forms of investment options for a third party when trying to invest in a private limited company.

• Investments via loans and advances: It has the most security in the way of returns as the investor will receive regular income by way of interest. But there are restrictions as to who can extend a loan to a private limited company, they are-
  – Members of the company – Directors of the company – Relatives of the directors – From another company
• Investment by way of debentures: Another safe method of investing in a private limited company is by way of debentures. There are two types of debentures:
  • Convertible debentures: Here, the person has the option of converting the debt into equity. But it must be noted that the earning from most convertible debentures is only average.
  • Non- convertible debentures: Here the debenture is not allowed to be converted into equity from debt. But the returns from it are usually higher.
• Holding shares: As mentioned earlier, a private limited company cannot offer up its shares in the general market; they are required to raise the capital for the company from personal connections. In the case where you would like to invest in a private limited company, one must approach the promoters, directors or the members of the company personally. As it’s not shares offered up on the market, the one investing must be ready to discuss the options with the people of the company regarding the terms of investment.

Important Points to Keep in Mind

There are always some key points to keep in mind when one is investing in any venture. In the case of investing in a private limited company, the following are the points to keep in mind.

• Management of the company:
  The investor has the option of being involved in the day to day operations of the company. The extent of involvement usually lies upon the amount of investment on the part of the investor. But this does not mean that the investor has to be involved in the management of the company. If the investor is purely invested in the profits and has no interest in managing the company, he or she has no obligation to do so.
• Control of the company:
  Control directly corresponds to the ratio of the shares held by each person investing (proportion of stakeholding). Higher the ratio, more control the said investor has in the decision making within the company.
• Returns on investments:
  This directly depends upon the scale of the company and the nature of the business they deal with. For example, recent trends show that investing in a start-up rarely gives positive returns in the first few years of its operations. On the other hand, investment opportunities are difficult to find in already matured companies.
• Liability:
  The liability arising from a private limited company is limited. This means that the liability only extends to the capital invested into the company and its corresponding amount. Personal property cannot be attached when debts are collected from the company.

Conclusion

Investments made into private limited companies are at the whims of the investors as well as the owners of the company. Investment is only possible if they come to private agreements in terms of their choices.

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

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