Funding Options explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A private limited company can raise money by issuing shares, preference shares or debentures, by taking loans, or by accepting deposits from members, and each route has its own provision. This guide puts them in one table, as per the Companies Act, 2013 in the Ministry's consolidated text (last updated 29 July 2022) and the Rules as consolidated in the Ministry's e-book, consulted on 3 October 2026. Private companies have exemptions from some provisions by notification under section 462; check whether one applies. Later amendments should also be checked.
Equity can be raised through a rights issue (section 62(1)(a)), a preferential issue or private placement (sections 62(1)(c) and 42), an ESOP (section 62(1)(b)) or sweat equity (section 54). Preference shares must be redeemable within twenty years (section 55). Debentures need a special resolution if convertible (section 71). Loans may or may not be "deposits" under rule 2(1)(c) of the Deposit Rules, and deposits from members are limited by rule 3. Each route has its own filings.
The table
| Route | Provision | What the text prints |
|---|---|---|
| Rights issue to existing equity holders | Section 62(1)(a) | Offer in proportion to paid-up capital by notice; period not less than fifteen days (or such lesser number as prescribed) and not more than thirty days; right of renunciation unless the articles provide otherwise; notice dispatched at least three days before the issue opens (section 62(2)) |
| Preferential issue or private placement | Section 62(1)(c), section 42, rule 13 of the Share Capital Rules, rule 14 of the Prospectus Rules | Special resolution; price on a registered valuer's report; offer only to identified persons, not more than two hundred persons in a financial year under rule 14(2); Form PAS-4 offer; PAS-3 return within fifteen days |
| ESOP | Section 62(1)(b), rule 12 of the Share Capital Rules | Special resolution of the shareholders; the rule defines "employee" and lists disclosures in the explanatory statement |
| Sweat equity | Section 54, rule 8 | Special resolution; shares of a class already issued; unlisted companies follow the rules |
| Preference shares | Section 55, rule 9 | Articles must authorise; special resolution; no irredeemable preference shares; redemption within twenty years (longer for infrastructure projects as printed); redeemed only if fully paid |
| Debentures | Section 71, rule 18 | Convertible option needs a special resolution; no voting rights; secured debentures: redemption within ten years (with the exceptions printed); debenture trustee and trust deed |
| Loans and other receipts of money | Rule 2(1)(c) of the Deposit Rules | Receipt of money by way of deposit or loan is a "deposit" unless the clause excludes it |
| Deposits from members | Section 73(2), rule 3 of the Deposit Rules | Resolution in general meeting; circular; limits in rule 3(3) and its provisos |
| Borrowing beyond a threshold | Section 180(1)(c) | Special resolution of the company where borrowings exceed the aggregate of paid-up share capital, the reserves in section 2(43) and securities premium, apart from temporary loans from bankers |
| Foreign investment, external borrowing | FEMA texts | One line each below |
The private placement flow is covered in our private placement guide, and the rights and preferential routes in further issue of shares. For a company planning an allotment, see our allotment of shares and PAS-3 service.
Equity routes in more detail
Rights issue. The offer goes to holders of equity shares at the date of the offer, in proportion as nearly as circumstances admit to the paid-up share capital on those shares. If a holder does not accept in the time given, the offer is deemed declined. After expiry or on earlier declination, the Board may dispose of the shares in a manner not disadvantageous to the shareholders and the company.
Preferential issue or private placement. Rule 13 permits issue to any persons on a special resolution, with section 42 conditions. For an unlisted company it requires authorisation by the articles, a special resolution, explanatory statement disclosures and allotment within twelve months of the resolution. Section 42(4) requires subscription money by cheque, demand draft or other banking channel and not by cash, and section 42(6) requires it to be kept in a separate bank account until allotment.
ESOP and sweat equity. Both are for employees or directors as the rules define them; see our sweat equity guide.
Preference shares
Rule 9(1) allows preference shares if the articles authorise, a special resolution authorises the issue, and the company has no subsisting default in redemption or in dividend due on preference shares. The resolution must set out items such as priority, participation, cumulative or non-cumulative dividend, conversion, voting rights and redemption. See our guide on preference shares under rule 9.
Debentures
Section 71(1) permits debentures with an option to convert into shares, wholly or partly, at redemption, but the issue must be approved by a special resolution passed at a general meeting. Section 71(2): no debentures carrying voting rights. Section 71(4) requires a debenture redemption reserve account out of profits. Section 71(5) requires one or more debenture trustees before a prospectus or an offer to the public or to its members "exceeding five hundred" for subscription of debentures. Rule 18 adds, for secured debentures, a maximum redemption date of ten years from the date of issue, a charge on assets sufficient for repayment, and appointment of a trustee not later than sixty days after allotment for the trust deed.
Loans: deposit or not
Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014 includes in "deposit" any receipt of money by way of deposit or loan or in any other form, and then lists exclusions. Items likely to matter to a private company:
- bank and financial institution loans (clauses (iii) and (iv));
- amounts received from any other company (clause (vi));
- money from a director or from a relative of a director of a private company, with the written declaration the clause prints and disclosure in the Board's report (clause (viii));
- bonds or debentures compulsorily convertible into shares within ten years (clause (ix));
- amounts raised by a start-up company through a convertible note of twenty five lakh rupees or more in a single tranche from a person (clause (xvii));
- advances in the course of business within the time printed (clause (xii)).
For the director and relative route in detail, see our guide on loans to a private company from directors and members.
Deposits from members
Section 73(2) allows a company to accept deposits from its members subject to a resolution in general meeting, a circular filed with the Registrar, a deposit repayment reserve account and other conditions printed. Rule 3(3) caps member deposits at thirty five per cent of the aggregate of paid-up share capital, the reserves defined in section 2(43) and the securities premium account. Its first proviso says a private company may accept from its members monies not exceeding hundred per cent of that aggregate and file the details in Form DPT-3. The second proviso says the maximum limit does not apply to a private company that is a start-up, for ten years from incorporation, or to a private company meeting three conditions printed in it. Rule 3(1)(a) bars deposits repayable in less than six months or more than thirty-six months, with the short-term proviso printed there. Check the full text before relying on any limit; see also our DPT-3 guide and DPT-3 service.
Borrowing powers
Section 180(1)(c) requires the consent of the company by special resolution for the Board to borrow beyond the printed threshold, apart from temporary loans repayable on demand or within six months from the date of the loan. Section 180 is worded for the Board of "a company"; as noted above, check whether a section 462 notification exempts your private company.
Foreign funding
Foreign investment in shares and borrowing from abroad are governed by the Foreign Exchange Management Act texts, which this guide does not summarise. See our FEMA compliance guide.
For tax on interest, dividends and capital receipts, see our income-tax guides.
Worked example (invented figures)
Epsilon Labs Private Limited has paid-up share capital of Rs 10,00,000, securities premium of Rs 5,00,000 and other reserves of Rs 5,00,000. Aggregate: 10,00,000 + 5,00,000 + 5,00,000 = Rs 20,00,000. Under rule 3(3), the ordinary cap on member deposits is thirty five per cent: 20,00,000 x 35 / 100 = Rs 7,00,000. Under the first proviso, a private company may accept up to hundred per cent: Rs 20,00,000, and files DPT-3 with the details. The director's loan, supported by the written declaration, is outside "deposit" under clause (viii).
Common mistakes
- Treating a member's loan as a deposit exempt without checking the clause.
- Issuing convertible debentures without the special resolution.
- Accepting deposits repayable in less than six months.
- Skipping the written declaration from a director who lends.
- Using shares for an offer to more people than the private placement limit.
Need help choosing a funding route?
If you are raising money, we can map the options to your articles, prepare the resolutions and file the returns. See our allotment of shares and PAS-3 service.
Key takeaways
- Each funding route has its own section, rule and resolution.
- Preference shares: redemption within twenty years, special resolution.
- Debentures with a convertible option need a special resolution.
- Rule 2(1)(c) decides whether a loan is a "deposit".
- Member deposits have limits in rule 3 and need DPT-3.
Read next
- Converting a Loan Into Equity Shares Under Section 62(3)
- Loans to a Private Company From Directors, Shareholders and Firms
- Private Placement of Shares Step by Step
- Preference Shares Under Rule 9
Disclaimer: Based on the Companies Act, 2013 in the Ministry of Corporate Affairs consolidated text (last updated 29 July 2022), the Rules as consolidated in the Ministry's e-book and the other official texts named in this article, as consulted on 3 October 2026. Later amendments, notifications, circulars, forms and fees should be checked. Formats are general drafts to be adapted to the company's articles and facts. This article is general information, not legal advice; check the official text before acting.