3 Major Issues about Raising Finance | India

This article throws light upon the three major issues about raising finance. The issues are: 1. The Effect of Legal form of Organization 2. The Provisions of the Companies Act, 1956 3. Control of Capital Issue.

Raising Finance: Issue # 1. The Effect of Legal form of Organization:

It is needless to mention that the sources as well as the amount of capital which can be raised by the firms depend upon their legal form For instance, a sole proprietorship or a partnership firm can raise their necessary finance only from debt capital since it is very difficult for them to raise finance from the loan capital. Apart from that the financial institutions do not find any interest to extend credit facilities to them.

But these difficulties actually are overcome by a corporate form since it has the following characteristics:

(a) Separate legal entity,

(b) Perpetuity,

(c) Limited liability, and

(d) Transferability of shares.

As a result of the above advantages, a corporate form of organisation may procure its necessary funds at a very large amount/rate in comparison with other forms of organisations stated above.

Raising Finance: Issue # 2. The Provisions of the Companies Act, 1956:

The provisions of the Companies Act, 1956, for the purpose of raising capital by equity or preference shares are presented below:

(a) A private company cannot make any invitation to the public to subscribe for its shares and debentures.

(b) In case of public companies, shares are issued to the public in response to their application according to the issue of prospectus which mentions the number of shares offered to the public. When allotment is made, a letter of allotment is sent to the concerned shareholder.

(c) Shares may be issued at par, at a discount or at a premium. If the shares are issued at a discount that must be done subject to the conditions laid down in Sec.

79 of the Act which are as under:

(i) The shares to be issued at a discount must be of a class already issued.

(ii) The issue of the shares at a discount must be authorised by a resolution passed by the company in the general meeting and sanctioned by the company Law Board.

(iii) The resolution must specify the maximum rate of discount at which the shares are to be issued. If the maximum rate of discount specified in the resolution exceeds 10%, it shall not be sanctioned by the Company Law Board (except in some special circumstances.)

(iv) The company must have been working for at least a year from the date it was entitled to commence business.

(v) The shares to be issued at a discount must be issued within two months after the date on which the issue is sanctioned by the Company Law Board.

When shares are issued at a premium, the premium should be credited to Share Premium Account (Sec. 78). But Sec. 78 imposes certain restrictions on its disposal.

The Share Premium Account may be applied by the Company:

(i) In issuing to the members of the Company fully paid bonus shares; or,

(ii) In writing-off preliminary expenses of the company; or,

(iii) In writing off the expenses of, or, the commission paid or discount allowed on, issue of shares or debentures of the company; or,

(iv) In providing for the premium payable on the redemption of redeemable preference shares or debentures.

The premium so received on shares cannot be used for any other purpose except with consent.

(d) If a member, having been called upon to pay any call on his shares, fails to pay the call, the directors have the power of forfeiting the shares held by the delinquent shareholder. Forfeited shares become the property of the company, but they may be re-issued or otherwise disposed-off on such terms and in such manner as the Board thinks fit.

But the price charged for re-issue must not be less than the amount that was in arrear at the time of forfeiting the shares, i.e., forfeited shares may be re-issued at discount provided the amount of discount must not exceed the amount forfeited.

(e) Rights issue, however, represents the issue of equity shares among the existing shareholders in the form of a fixed proportion, i.e., 1 to 4 etc. The price is less than the market price and ‘rights’, may be sold if required and the buyer of the ‘right’ is entitled to purchase the fresh shares issued by the company.

(f) Debenture may also be issued at par, at a discount and at a premium. There is no legal compulsion on the price for which the same is issued.

Raising Finance: Issue # 3. Control of Capital Issue:

This is an important information for company promoters and managers. The Control of Capital Issues came into being in India for the first time in May 1946, as a war-time measure which was continued till September 1946.

It was then continued by the Capital Issue (Continuance of Control) Act, 1947, and the Exemption Order and Rules made there under which was administered by the Ministry of Finance, Department of Economic Affairs, and by extending its life from time to time. It was made permanent in 1956.

The objects of this Capital Issues Act was:

(a) To check the mushroom growth of companies and inflation;

(b) To give priority to munitions productions;

(c) To effect proper utilisation of national resources in order to secure a balanced investment in industry; agriculture and the social service; and

(d) To canalize properly the invisible funds of the country.

The Capital Issues Control Act, 1947, defines issues of capital as, “issue of any securities, whether for cash or otherwise, and includes capitalisation of profits or reserves for the purpose of converting partly paid shares into fully paid shares or increasing the par value of shares already issued”.

Sec. 2(e) of the Act defines securities as any one of the following instruments issued, or, to be issued, or, created or to be created, or, for the benefit of the company, viz.:

(i) Shares;

(ii) Debentures;

(iii) Mortgage, Deeds, instruments of pawn pledge, or hypothecation and any other instruments, creating or evidencing a charge or lien on the assets of the company.

(iv) Instruments acknowledging loan to or indebtedness of the company and guaranteed by a third party or entered into jointly with a third party.

The Act requires the permission of the Controller of Capital issue in the following cases:

(i) Making an issue of capital in and outside India,

(ii) Making any public offer of securities for sale in India;

(iii) Renewing or postponing the date of maturity or repayment of any security maturing for payment in India;

(iv) Issuing any prospectus or other documents offering for subscription or publicity for sale of any securities in India

Under this Act, no limited company was permitted to issue share capital of more than Rs 25 lakhs without the previous permission of the Central Government.

The Govt. of India by an order, Feb 1969, had relaxed the above control over issues of capital by companies By that order, the Govt. had retained control only over bonus issues of all companies without any lower exemption limit and issues of capital at a premium by public limited companies. Subject to the above restrictions, practically all other categories of capital issue had been exempted from the Control.

The Capital Issues (Exemption) Order, 1969, as amended by the Amendment Order of 1974, grants exemption to the following cases:

(i) Companies who are making issues of shares and Debentures of not more than Rs 50 lakhs during a period of 12 months.

(ii) Loans that are taken by companies from banks in order to meet their requirements of Working Capital.

(iii) Any loans taken from financial institutions.

(iv) Except where an offer of shares for subscription by the public is involved, private limited companies, banking and insurance companies, and Govt. companies are completely exempted from the control.

Public Limited Companies is exempted from the control so long as they issue capital not exceeding Rs. 50 lakhs during a period of 12 months subject to fulfilment of the following conditions:

(i) The debt-equity ratio must not exceed 2: 1 and equity and preference share capital ratio must be maintained under 3:1

(ii) Shares are to be issued at par

(iii) If there is any ‘call’ that must be made on uniform basis and shares are to be fully paid up over a maximum period of 5 years.

(iv) The rate of interest on debentures and the rate of dividend on preference shares must not exceed the maximum limit which has been notified by the controller.

(v) The shares offered to the public must be in such a manner so that the same is eligible for listing on a recognised stock exchange.

Public limited companies issuing capital exceeding Rs. 50 lakhs during a period of 12 months would be required to file a statement of their capital issue proposals with the controller at least 30 days before the date of the proposed offer of capital.

If however, the proposals conform to certain well-established financial criteria accepted by commercial circles, the companies concerned are free to issue their capital without having to obtain consent from the controller.