Raising funds is a critical aspect of scaling a business. While private limited companies enjoy limited liability and operational flexibility, their funding options are more restricted than public companies.
One common question that arises is, Can a private limited company issue public debentures to raise capital?
The answer isn’t straightforward, as it involves various legal provisions and regulatory restrictions. Let’s break it down.
Understanding Debentures: A Quick Overview
Debentures are a form of debt instrument used by companies to raise capital from investors. They function similarly to loans, where the company agrees to pay interest and return the principal amount on maturity.
There are two types of debentures:
1. Private Debentures: Offered to select investors, usually institutional or high-net-worth individuals.
2. Public Debentures: Openly issued to the general public, similar to bonds.
Now, let’s address the key question: Can a private limited company issue public debentures?
Legal Restrictions: What the Companies Act, 2013 Says
According to Section 2(68) of the Companies Act, 2013, a Private Limited Company:
- Cannot freely transfer shares or securities to the public.
- Cannot issue debentures publicly or list them on stock exchanges
This means that a private company cannot issue public debentures. However, they can still raise funds via private placement of debentures under Section 42 and 71 of the Companies Act, with specific legal compliance.
How Can a Private Limited Company Issue Debentures?
Although a private company cannot issue debentures to the public, it can privately place them to select investors such as:
- Banks and Financial Institutions
- Private Investors or Venture Capitalists
- Existing Shareholders & Directors
For this, the company must comply with the following legal requirements:
- Approval from Shareholders: A special resolution must be passed in a general meeting.
- Debenture Trust Deed: If secured debentures are issued, the company must create a trust deed with a debenture trustee.
- ROC Filing: The company must file Form PAS-3 for allotment details.
- Limit on Private Placement: A company can issue debentures to a maximum of 200 persons in a financial year.
What About Listing Debentures on Stock Exchanges?
Only public companies can list debentures on stock exchanges. Private companies are not allowed to do so. If a private company intends to raise funds publicly, it must first convert into a public limited company and comply with SEBI regulations.
Alternatives for Raising Capital Without Public Debentures
Since issuing public debentures is not an option, private companies can explore:
- Bank Loans & Credit Lines – Easier and structured borrowing.
- Venture Debt – Raising funds from venture capital firms offering structured debt.
- Convertible Debentures – Issued privately with an option to convert into equity.
- Angel Investors & Private Equity – Direct capital infusion without listing debentures.
Can Private Companies Issue Public Debentures?
- No, private limited companies cannot issue debentures to the public.
- Yes, they can issue debentures through private placement with strict legal compliance.
Raising funds requires strategic planning and legal due diligence. Before issuing debentures, ensure compliance with RBI, SEBI, and MCA regulations to avoid penalties.
How Coinshell Helps You Stay Compliant?
At Coinshell, we simplify debt structuring, legal compliance, and fundraising strategies for private companies. Whether you need guidance on debenture issuance, private placements, or regulatory approvals, we’ve got you covered!
Contact us today or visit www.coinshell.in to explore your funding options!
