How can a Third Party Invest in a Private Limited Company?

The Ministry of Corporate Affairs regulates the Private Limited Company in India, which are owned by non-governmental organizations or by a small number of shareholders/members. The Private Limited Company is currently a hot favourite among aspiring entrepreneurs due to its unique advantages such as ease of creation, the requirement of only two members, limited liability, and so on. The most significant disadvantage of a private limited company is that it is unable to sell its company stock/shares to the general public on a stock exchange. Instead, the stock of a private limited company is exclusively owned, offered, and traded/exchanged privately. Due to the fact that the general public is not permitted to invest in a Private Limited Company, Investing in a public company is beneficial for an investor. The following information is provided to assist the reader in comprehending the following:

Various considerations to bear in mind before investing in a Private Limited Company.
Various approaches to investing in a Private Limited Company.

Considerations Before Investing in a Private Limited Company:

Any investor who is willing to invest money usually has the following goals in mind:

Return on investment (in the form of interest, dividends, or principal appreciation, for example)
Safety and security of the principal balance.
Liquidity is abundant (i.e. When needed, the investment can be easily converted into cash).

Before investing in a Private Limited Company, the investor should consider the following factors based on the aforementioned investment purpose.

When it comes to the financial benefits of investing in a Private Limited Company:

If an investor wants to invest in a start-up company, the chances of getting a low return, in the beginning, are higher than if the investor wants to invest in an already established company. Higher returns can be obtained by investing in shares. Investing in debentures or loans, on the other hand, yields average returns.

Control over operations in relation to the safety of the principal amount:

If the investor chooses to invest in a Private Limited Company by purchasing company shares. Such investor shareholders may have voting power, giving them some control over the company's operations and decision making. However, while investing in stocks can yield higher returns, the safety of the principal amount is relatively low.In contrast, if the investor invests in the form of debentures or loans and advances, the return will be average. At the same time, the principal amount would be more secure. As a result, the option can be chosen based on the investor's needs/requirements.

Liability:

The liability of a private limited company is restricted. This means that the liability is limited to the amount invested in the company and its corresponding capital. When debts are accumulated from the company, personal property cannot be attached.

Third-party investment options in a Private Limited Company:

As previously stated, a private company cannot raise capital by selling shares to the general public. This is only permitted for publicly traded companies. Instead, they can only accept investments from company members, family, and friends to raise capital for the business. As a result, capital must be raised through private means. To invest in a private limited company, one must approach the company's members personally. When attempting to invest in a private limited company, a third party has three investment options.

Debentures:

Debentures are another safe way to invest in a private limited company. Debentures are classified into two types: Convertible debentures: This type of debt allows the holder to convert the debt into equity. However, it should be noted that most convertible debentures earn only average returns. Non-convertible debentures: In this case, the debenture cannot be converted into equity from debt. However, the returns are usually higher.

Investing in Loans and Advances:

Investing in the form of loans and advances is the simplest way to invest in a Private Limited Company with an average return and full security of principal. The investor would receive interest payments on a regular basis. However, there are some restrictions on the types of people from whom a private limited company can accept loans. A private limited company can only accept loans from the following sources: 1)Relatives of Directors 2)Other Company 3)Members 4)Directors

Holding Shares:

As previously stated, a private limited company cannot sell its shares on the open market; instead, the company must raise capital through personal connections. If you want to invest in a private limited company, you must approach the promoters, directors, or members of the company personally. Because these are not publicly traded shares, the investor must be willing to discuss the terms of investment with the company's executive.

Other miscellaneous options:

If the investor is not interested in any of the above options, other options such as venture capitalists, angel investors, and so on are available. Investors with such additional options can also invest in the Private Limited Company.