• Investing in another Company

Objective

MY COMPANY Group Pvt Ltd (company yet to be incorporated), hereinafter will be referred as ‘MY COMPANY’ wants to invest in Company A Private Limited. Company A was primarily founded by Mr. X who is currently a Director cum shareholder (50% equity). 
The purpose of Investment is to obtain Equity holding in the company as well as to handle administration in the daily affairs. Therefore, MY COMPANY will be holding 50% of Equity shares and have 50% of Board of directors. For this, MY COMPANY has valued Company A at Rs 20-25L (approx)

About Company A
Company runs a Gaming café in Bangalore. The current source of revenue is the hourly usage charges and Food & Beverages. Post investment, we will also venture into franchise model in the future.
Mr. X also has a Team – ‘TEAM X’ of professional gamers who participate in various e-Sports competition. Prize money earned is currently being divided between Mr. X and players. Players are not on the payroll of the company. Team X is not a separate legal entity and is sort of part of Company A. There is nothing on record which makes Company A an owner of the Team X.
List of Clarifications
A.	Investment in Company A
1.	How will the payment of Rs 20-25L be carried out? What is the process? We want the money that we pay to be immediately invested into the company. How to legally enforce that.
Pay-out structure yet to be finalized.
2.	Should we create a separate legal entity just for Team X? If yes, advantages. If no, how can Company A ‘own’ Team X?
3.	MY COMPANY would like to commence business operations with Company A ASAP. By the time process of company incorporation, payment to Company A, etc happens, can we have an agreement/MOU which will legally bind the parties.
4.	How to restrict both the parties from starting a similar line of business on their own.
5.	If a third party is interested in sponsoring Team X, how will that transaction happen. Will it help if Team X is a separate legal entity for sponsorship.
6.	Is there any difference between Employee contracts or Player contract? 

B.	Source of Funds
1.	What are the restrictions for a private limited company for acceptance of loans from the point of view of ‘The Companies Act, 2013 and Income Tax Act, 1961 or any other law which can be related.
2.	Can MY COMPANY accept loan from Related parties. Related party here could mean another private company where the director or shareholder of MY COMPANY owns share or is director or both, Proprietorship run by family members, family members in their individual capacity, etc.
3.	Rules and regulations for transfer of funds happen between Holding and subsidiary company.
4.	Can debentures be used as an alternate source of funds in case direct transfer as loan from third-parties is highly restricted. What are the advantages, rules and regulations of debentures?
Asked 4 years ago in Business Law

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3 Answers

Dear Cleint,

No existence of My Company, without incorporation, Start of business after receiving certificate of incorporation.

Investment possible by way of share purchase by Investment Company’ - a company whose principal business is the acquisition of shares, debentures or other securities.

Otherwise no such direct investment permitted to acquire holding.

At present A has no existence or just proprietary without registration as to form company at least 2 directors and members required.

Without incorporation certificate , no MOU between companies but between owner of My Company and A.

Third party can sponsored by way of loan.

Players will hire for gaming whereas employees shall be for working.

Company is desirous of obtaining loan from any other person then they have to comply with the Deposit rules which include obtaining credit rating, issuing circular, creating deposit repayment reserve account, etc.

Related party loan is restricted.

Section 47(iv) of Income Tax Act.

Debenture is alternative solution and permissible.

Yogendra Singh Rajawat
Advocate, Jaipur
21481 Answers
31 Consultations

4.4 on 5.0

As per the provisions, the Companies can accept unsecured loan or deposit from Director of the company provided further that such amount is not a borrowed amount and can accept inter corporate loan(s) from another body corporate and not from any other person.

२) private Limited Companies which have borrowed money in excess of its paid up capital and free reserves are required to pass special resolution and members have to decide up to which limit the Company can borrow. As per provisions of Section 180 of the Companies Act, 2013 every such company has to comply this provision immediately.

3) The borrowings of the company from banks, financial institutions or any body corporate shall not not exceed twice the amount of paid-up share capital or INR 500 million – whichever is lower; and

There shall be no subsisting defaults in repayment of such borrowings at the time of making transaction.

4) private limited company issue bonds/ debentures under the companies act 2013. ... In fact a private limited company can do private placement and also list the same in BSE or NSE under the debt segment after complying with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Ajay Sethi
Advocate, Mumbai
87955 Answers
6207 Consultations

5.0 on 5.0

1. The structure for investment and return of investment including losses should be chalked out by mutual talks in a meeting between both the companies.

There is no legal format for a mutually agreed situation and terms and conditions.

2.If the team X is not under control of the company A legally, then team X should be treated as a private entity and their services are to be leased or hired on the agreed terms between the team and the company A.

A decision is to be taken in this regard as per articles of association in a board of directors meeting involving all major shareholders in the meeting.

No individual decision can be held as legally valid decision.

3.My company's business agreement or joint venture is between the both the companies. i.e., My company and company A.

Now both the companies have to resort to their own terms and conditions after having resolved the same their respective board of directors meeting after which a joint resolution may also be passed about the modalities for joint venture. Both the companies are separate entities but are willing to do this business jointly, so a separate agreement in this regard may be the guidelines for all the transactions and the business to be carried out jointly.

4.This can be drawn as a pre-condition that either of the company should not start their own business on the same line till this agreement between both the companies are in force.

5. A Provision to this effect may be made in the articles of association or memorandum of association with terms and conditions governing all the issues involved in it.

6. Yes, they both are standing on different platform.

B.1 As per companies act, 2013 section 2(31) Deposit includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

A. Procedures to be followed for taking Loan from Members (Company):

As per Chapter V, Rule 2(1) (c) (VI), any amount received by a Company from any other company is excluded from the definition of deposits. Therefore, loans taken by a Company from any other Company, even if such other Company is its member, will not be treated as deposits. Hence the provisions and procedures required to be followed for accepting deposits in Chapter V under the Companies Act, 2013 will not be applicable in such cases.

B. Procedures to be followed for taking Loan from Members (Company):

As per Chapter V, Rule 2(1) (c) ( VII ), any amount received by a Company from a person who, at the time of the receipt of the amount, was not a Director of the Company but was member of the Company will not be considered as deposit, Because Private Companies are allowed to accept Deposits from the members upto 100% of Paid up Share Capital and Free Reserves.

C. Procedures to be followed for taking Loan from Members (Other than Company & Directors):

Private Company can accept deposits from the Members.

*Private Company can accept deposits from Members without complying with the Provision of Section 73(2) clause (a-e) following private Companies:

1) Which accept from its members monies not exceeding 100% percent of aggregate of the paid up share capital, free reserves and Securities Premium account; OR

2) Which is a start-up, for five years from the date of its incorporation; OR

3) which fulfill all of the following conditions, namely:-

a. Which is not an associate or a subsidiary of any other Company;

b. If the borrowing of such a company from the banks or financial institutions or anybody corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and

c. Such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under the section.

Provided that all the Companies accepting deposits shall file the details of monies so accepted to the Registrar of Companies in Form DPT-3.

3. As per Section 2(46) “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies

As per Section 2(87) “subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company—

If a Company is a Subsidiary of another Company. Following are the implication:-

Many relaxations to private Company are not available to subsidiary of public Company.

Subsidiary of Public Company is Public Company.

Subsidiary can’t given loans for purchase of shares of holding Company

Company can’t buy its shares through subsidiary.

A holding Company can and does hold shares of subsidiary, but a subsidiary can’t hold shares in its holding company. Share allotment made to subsidiary is void.

This restriction applies even if shares are held by nominee of subsidiary Company and not by the subsidiary company itself.

The minutes of the Board meetings of the subsidiary company shall be placed for review of the Board meeting of the holding Company.

The Board report of the holding Company should state that they have reviewed the affairs of the subsidiary company also.

The definition of Subsidiary Company mentions ‘total share capital’. Hence, preference capital can’t be ignored. Thus, even if a company has less than 50% equity shares in another company, the other Company can be its holding company, if including preference share capital, the total holding is more than 50%.

T Kalaiselvan
Advocate, Vellore
78113 Answers
1543 Consultations

5.0 on 5.0

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