A private limited company is an entity owned by a private party/s whose shares cannot be offered to the public in general. The Companies Act, 2013^[1] regulates private limited companies in India. The registration of a private limited company can be done via the Ministry of Corporate Affairs official portal. A private limited company is one of the most recommended ways to start a business since it offers various benefits absent in public entities.  For instance,  a private limited company provides limited liability to its shareholders; it also pushes public interference away due to the non-transferable nature of its shares. All these benefits have made the idea of making an Investment in private limited company sound very enthusiastic. Still, before investing in a private limited company, several things must be kept in mind.

Reason for Investing in Pvt limited company

Following are the goals  in the mind of the investor before investing :

• Earning through returns in the form of interest or dividend etc 

• To keep the principal amount safe and secure.

• Easy liquidity of the Investment in the form of cash for future security.

Important factors of Investment in private limited company 

Following are the factors that need to be considered before investing in a private limited company to achieve the objectives and goals of the Investment:

• Risk of low returns from the Investment:  Investing in a startup company does not yield significant profits from the start. There is a good chance of low returns in case of an investment in startup companies.  If the objective is to earn high returns in a shorter period, they should go for Investment in an already existing company that is well established.

• Security of the principal amount: Often, investors invest in a private limited company via purchasing shares in that company. Such a purchase can give the investor voting power.  The investors can provide control over the operation and decisions of the company in accordance with the number of shares purchased. This can raise the earnings through returns, but the safety of the principal amount will be deficient. It is recommended that investors instead invest by acquiring debentures; this will increase the security of the principal amount. 

Investment Options for the third party in a private limited company 

Following are the options available to a third party while making an Investment in private limited company:

• Investment through loans or advances: Since a private limited company does not offer its shares to the public, a third party does not have the option to invest via shares. However, they can invest in a private limited company via loans and advances with certain restrictions prescribed by the regulatory authority.  A third party can yield profits through an interest in the Investment.

• Investment through debentures:  One of the safest options to invest is through debentures. Debentures are a widely used type of long-term debt instrument or bond which is not secured by any collateral. There are two kinds of debentures through which Investment can be made:
  1. Convertible debentures: The investor can convert the debt into equity in these kinds of investments, and the returns are not high.
  2. Non-convertible debentures: Here, converting debt into equity is not permitted, but the returns are very high.

• Investment via shares: Although a private limited company does not offer its share to the general public, a third party can do so by making personal connections with the company’s core team. A third-party investor can personally approach the promoters and directors of the company and discuss the options available for them to invest in that particular company. 

Points to be kept in mind while investing in private limited company 

Following are some of the important issues that need to be kept in mind while investing apart from the options and prerequisites for Investment:

• When an investor invests via debentures, it should always be in mind that the liability is limited in a private limited company.  So, the debt money can be collected only from the capital amount invested by the shareholders.

• Before investing, the investor should be very clear about the business scale in which Investment has to be done. Usually, finding investment opportunities in a well-established company is a difficult task, unlike startups where the probability of return income is low.

• If an investor invests in shares, he/she gets control over the operation of the company to the extent of their Investment. 

• If a company is making a sales pitch to an investor, it will show the best picture of the company. It is always better to decide after a proper assessment of the risks and mitigations involved.

• The exit strategy for any investment is as important as the process of decision-making before the Investment is actually made. A business will always involve risks, and thus, an investor should be ready with a proper exit strategy in unfortunate circumstances. 

• An investor needs to calculate the estimated annual growth of a company in which Investment has to be done. Understanding the company’s visions, goals and objectives, and most importantly, the plan of execution and practicality of the goals can clarify the investors. If these things are very difficult for the investor himself/herself, then professional help can be taken for analysis.

Conclusion

The decision to invest in private limited company should be made upon a well-analyzed and measured. Business involves risks, and any investor should consider specific parameters and factors before making an investment in private limited company. There are several ways and modes for Investment in private limited company. The idea is not to get carried away by certain things and make a prudent choice since it involves a huge amount of money.

Read our article:Compliances And Rules For Private Limited Companies In India