Fundraising Under Companies Act 2013 – Securities

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Corporate fundraising has accelerated in recent years due to the booming start-up culture and entrepreneurship in India. While starting a business faces many challenges, the main hurdle facing any start-up business is raising capital.

Companies incorporated under the Companies Act 2013 (“Law“) have the ability to issue various instruments to their investors and meet their capital requirements from time to time. The technical term for instruments issued by companies to investors is “securities”. While the issuance of securities represents the interest of an investor in the company, it is mainly a set of rights and obligations accruing to the investor either at the time of its issuance or upon the occurrence of specific events or the liquidation of the company Once the securities are issued to investors, they may or may not modify the table of capital. The table of capital is a structure representing the total capital injected into a company subdivided into the percentage of participation held by each shareholder.

Instruments issued by companies under the Act

Instruments commonly issued by companies at the time of raising funds are equity-based instruments, debt-based instruments or hybrid instruments (containing a combination of features of both equity- and debt-based instruments). The nature of the instrument to be issued by a company depends to a large extent on the valuation of the company obtained by different mechanisms.1 Business valuation is a common problem faced by early-stage startups. That said, for each group promoting a start-up, the question of a title with the least risk factors is generally the golden rule.

The main difference between issuing equity-based instruments and debt securities is the dilution of the shareholding of the company’s existing shareholders. While the issuance of purely equity-based instruments results in an immediate dilution of the existing shareholding, the issuance of debt instruments (if they are convertible in nature) will result in a dilution of the shareholding at some stage. later in the life of the company. In simple terms, share ownership dilution is the reduction in the total amount of share ownership percentage of existing shareholders caused by the issue/grant of new shares to a new investor. The types of securities generally issued during a fundraising (under the Law) are detailed below

Equity instruments / Equity shares

Nature Types of Equity Shares
Shares of a company which represent the ownership of the investor up to the fraction of shares held by that person and allow a right to vote in decisions relating to the company. · Participating shares with voting rights – shares which allow each holder to participate and vote at all meetings of the company and thus to manage the operations of the company.

Participation Shares with Differential Voting Rights (“DVRs“) – shares with higher voting rights (i.e. multiple votes on a capital share), lower voting rights (i.e. a fraction of the voting right on a share of capital or shares with differential rights as to the dividend).2

· Employee Stock Options (“ESOP“) – ESOPs are benefits given to employees of a company to purchase or subscribe for shares of the company at a future date at a predetermined price.

Sweat capital shares – shares of capital issued by a company as a reward to its employees for providing their know-how or making available rights in the form of intellectual property rights or value additions, under any name whatsoever, for consideration other than cash.

Preference share

Nature Types of preference shares
· Shares which confer on their holder a preferential right to receive a fixed dividend during the life of the company as well as a preferential right to receive the amount paid on these shares during the liquidation of the company.3

· Does not confer the right to vote in ordinary circumstances.

· Participating and non-participating preferred shares – right to a fixed preferential dividend and right to participate in excess profits.

· Cumulative and non-cumulative preferred shares – right to claim a dividend fixed at a sum or percentage for the past and current year out of future profits; and

· Redeemable preferred shares – obligation for the company to redeem the shares after a specified limit.


Nature Types of debentures
· Security materializing a debt owed to the holder of a bond by the company reimbursable in principal with interest.

· The debenture may or may not be secured by the assets of the company.

· Callable debentures – debentures which, upon issuance, will be redeemed to the bearer within a specified time;

· Convertible debentures – debentures that can be converted into shares within a specific time period or upon the occurrence of specific events. Mandatory Convertible Debentures or CCDs must be converted into shares within 10 years from the date of their issuance, otherwise they will be treated as a “deposit” under the law.4

Hybrid instruments

Nature Types of hybrid securities
· Securities with both debt and equity elements. Hybrid securities generally issued by corporations include optionally convertible (fully or partially) debentures, mandatory convertible debentures, mandatory convertible preferred shares and optionally convertible (fully or partially) preferred shares which are all convertible into shares of the company at specified events.


Raising capital is one of the main requirements for starting and sustaining a successful start-up business. While the proposed idea and/or innovation is a seed that can be planted initially by start-up, the continued operation of the idea requires constant watering in order to grow and develop from a plant to a fully rooted tree. . The continuous watering process is carried out by means of a constant flow of financing which, in turn, is implemented by the issuance of capital instruments explained above.

The issuance of instruments, in turn, gives the investor certain rights and obligations by virtue of meeting the capital requirements of the company. Each instrument has different nuances surrounding their issue and its resulting impact on business operations. The elimination and finalization of instruments when raising funds also largely depends on factors such as the sector, the business plan of the company and the nature of the investor to name a few- one. For example, the real estate sector is based on long-term development and therefore the main choice would be the issuance of potentially convertible bonds or possibly convertible preferred shares. While service/knowledge companies prefer to issue Mandatory Convertible Debentures, Mandatory Convertible Preferred Stock or Equity in light of short term milestones set by these companies. Finally, the structuring of a fundraising differs according to the nature of the investor approached by the company. While “friends and family” rounds include mandatory convertible preferred stock due to investors’ flexibility to dilution in future rounds, several other investors such as foreign portfolio investors, private equity funds risk, angel funds, etc. have their own predetermined route. strategies to achieve strong investment growth.


1. For more information on the different aspects of valuation, please refer to our article Investing in Startups: The Essentials of a Term Sheet and Valuation Methods – A Perspective India (part 2) available at -ii/, last visit 8e April 2020

2. Shruti Rajan, SEBI Differential Voting Plans Critical Change, Livemint, 28e June 2019 available on visit 8e April 2020

3. Explanation of Section 43 of the Companies Act, 2013

4. Rule 2(c)(ix) of the Companies (Acceptance of Deposits) Rules 2014

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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