As per the Companies Act, 2013 there are two ways by which a company can raise its funds. It can be done through the private placement of shares and rights issue of shares. It is important to know that a private company can either issue shares to its existing or current shareholders by the method of the rights issue or provide them bonus shares.
The first method of allotting shares i.e. private placement of shares implies the sale of securities to a small group of selected investors with the purpose of increasing capital. Usually, mutual funds, banks, pension funds, and insurance companies invest in the private placement of shares. It has to be taken care that during the private placement of shares, the invitation to subscribe securities should not be made to more than two hundred persons in aggregate in a financial year.
The second method of allotting shares i.e. Right issue of shares refers to the issue of rights to the existing shareholders of the company. It allows them to buy additional shares directly from the company in proportion to their current holdings, within a set period of time. Under the right issue of shares, a company can issue shares on a preferential basis and can also issue sweat equity shares. Sweat Equity Shares refers to the equity shares, issued by a company to its employees or directors at discount or for consideration, other than cash.
The directors of the company are authorized to arrange funds for the company. For short-term funds need, they normally resort to the loan or short-term credit facilities. However for long-term use or to achieve the long-term vision and objective of the company, the issue of a new equity share is the best option. The new equity shares can be allotted at the fair market value or the premium, the issue of shares at a discount is prohibited by the companies act, 2013.