What is Equity Funding under Companies Act, 2013?
Equity Funding under the Companies Act 2013 refers to the process through which a company raises its capital by issuing shares to investors in exchange for ownership in the company. Equity represents ownership in a company, and those who hold equity shares are known as shareholders or equity investors. Companies Act 2013 has made strict regulations concerning the concealment of funds. A company is not permitted to make any sort of investment through more than two layers of investment companies. It is observed that corporations use this as a common practice to divert funds via investing through several step-down subsidiaries. Placing such restrictions can help prevent the diversion of such funds.
Section 186 of the Companies Act 2013 applies to both public and private companies. The section deals with the provisions regarding ‘Loan and Investment’ by a company. In addition to Section 186, Rules 11, 12, and 13 also provide provisions governing the making of loans and investments, giving of guarantees, and providing of securities by a company.
Geeky Takeaways:
- The Companies Act 2013 has crucially handled the issue of concealment of funds by diverting them to several subsidiaries. A company is not permitted to make investments through more than two layers of investment companies.
- Section 186 is restrictive, and its focus is on governing intercorporate loans and intercorporate advances.
- Section 186 applies to both public and private companies.
- By imposing limits, requiring board approvals, and mandating disclosure, the Companies Act promotes responsible financial management and also protects the interests of stakeholders.
Table of Content
- Section 186 of Companies Act, 2013
- Legal Requirements for Equity Funding
- Non-applicability of Section 186
- Penalty for Contravention of Section 186
- Conclusion
- Equity Funding under Companies Act, 2013- FAQs