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Corporate Finance in India

Introduction​

This guide introduces the legal framework governing corporate finance in India for law students and LLB candidates. Corporate finance, in a legal sense, is concerned with how a company raises, structures, and manages the funds it needs to carry on business, and the legal safeguards that protect shareholders, creditors, and the investing public. The core statute is the Companies Act, 2013, supplemented by regulations made by the Securities and Exchange Board of India (SEBI) for companies that access the public capital markets.

Key Concepts​

What is Corporate Finance?​

Corporate finance refers to the ways in which a company sources and deploys capital to fund its operations and growth. Broadly, a company raises finance through two channels:

  • Equity (share) capital — funds contributed by members in exchange for ownership rights.
  • Debt capital — borrowed funds, such as debentures, loans, and deposits, which must be repaid.

The mix of these two sources is a company's capital structure, and much of company law is devoted to regulating how each type of capital is raised and protected.

The principal sources of law relevant to corporate finance in India are:

  1. Companies Act, 2013 — the primary legislation. It regulates the issue of shares (Chapter IV), the issue of debentures, the acceptance of deposits (Chapter V), charges over company property (Chapter VI), and the alteration and reduction of share capital.

  2. Securities Contracts (Regulation) Act, 1956 — governs trading in securities and listing on recognised stock exchanges.

  3. Securities and Exchange Board of India Act, 1992 — establishes SEBI as the regulator of the securities market and empowers it to protect investors and regulate the raising of capital from the public.

  4. Foreign Exchange Management Act, 1999 (FEMA) — regulates the inflow and outflow of foreign capital, including foreign direct investment into Indian companies.

Sources of Corporate Finance​

1. Share Capital​

Share capital is the amount raised by a company through the issue of shares. Key concepts include:

  • Authorised (nominal) capital — the maximum amount of share capital a company is authorised to issue, as stated in its memorandum of association.
  • Issued and subscribed capital — the part of the authorised capital actually offered to and taken up by members.
  • Paid-up capital — the amount members have actually paid on their shares.

Under the Companies Act, 2013, a company may issue two broad kinds of shares:

  • Equity shares, carrying voting rights and a residual claim on profits and assets.
  • Preference shares, carrying a preferential right to dividend and to repayment of capital on winding up, but ordinarily limited voting rights.

Companies raise fresh share capital principally through:

  • Public issue (including an Initial Public Offering, or IPO) — an offer of shares to the public at large.
  • Rights issue — an offer of further shares to existing shareholders in proportion to their holdings.
  • Private placement / preferential allotment — an offer to a select group of identified investors.
  • Bonus issue — the capitalisation of reserves by issuing free shares to existing members.

2. Debentures and Borrowings​

A debenture is an instrument acknowledging a company's debt, usually carrying a fixed rate of interest and, often, security over the company's assets in the form of a charge. Debentures may be secured or unsecured, convertible or non-convertible, and redeemable at a future date. Charges created over company property to secure borrowings must be registered with the Registrar of Companies so that they are visible to other creditors and the public.

3. Deposits​

The Companies Act, 2013 regulates the acceptance of deposits from members and, in limited cases, the public. The rules impose conditions on the amount, tenure, and repayment of deposits, together with disclosure and depositor-protection safeguards. These provisions respond to historical instances of companies collecting public money without adequate protection for depositors.

Regulation of Public Fund-Raising​

When a company raises money from the public, it enters the domain of SEBI regulation in addition to the Companies Act. Key regulatory instruments include:

  • SEBI (Issue of Capital and Disclosure Requirements) Regulations — govern public issues and rights issues, and require a prospectus disclosing material information so investors can make an informed decision.
  • SEBI (Listing Obligations and Disclosure Requirements) Regulations — set out the continuing obligations of a listed company, including periodic financial disclosures and corporate-governance requirements.

A central principle running through both the Companies Act and SEBI regulations is disclosure: those who invite public investment must fully and truthfully disclose the facts material to that investment, and misstatements in a prospectus can attract civil and criminal liability.

Corporate Restructuring: Mergers and Acquisitions​

Corporate finance also encompasses mergers, amalgamations, and acquisitions, through which companies combine or reorganise their capital. The relevant legal considerations include:

  • Companies Act, 2013 — Chapter XV contains the scheme-of-arrangement provisions governing compromises, arrangements, and amalgamations, which require the approval of the members/creditors and the sanction of the National Company Law Tribunal (NCLT).
  • Competition Act, 2002 — regulates "combinations" (large mergers and acquisitions) that may cause an appreciable adverse effect on competition, and is administered by the Competition Commission of India (CCI).
  • SEBI (Substantial Acquisition of Shares and Takeovers) Regulations — govern the acquisition of substantial stakes and control in listed companies, including the obligation to make an open offer to public shareholders.

Foundational Case Law​

Two long-standing principles of company finance every student should know:

  • Salomon v. Salomon & Co. Ltd. (1897) — established the doctrine of separate legal personality: a company is legally distinct from its members. This is the foundation on which a company holds its own capital, incurs its own debts, and enters financial transactions in its own name.

  • Trevor v. Whitworth (1887) — established the principle of maintenance of capital: a company's share capital is a fund available to its creditors and generally may not be returned to shareholders except in ways the law expressly permits. This principle underlies the statutory rules that restrict the reduction of share capital and the purchase by a company of its own shares.

Conclusion​

Corporate finance law seeks to balance a company's need to raise capital efficiently against the protection of those who provide that capital — shareholders, creditors, depositors, and the investing public. A sound understanding requires familiarity with the share-capital and borrowing provisions of the Companies Act, 2013, the disclosure-based framework administered by SEBI, and the foundational judicial principles of separate legal personality and maintenance of capital. As markets and regulation continue to evolve, students should track legislative amendments and current SEBI regulations rather than rely on any single fixed statement of the law.

References​

[1] Companies Act, 2013 [2] Securities Contracts (Regulation) Act, 1956 [3] Securities and Exchange Board of India Act, 1992 [4] Foreign Exchange Management Act, 1999 [5] Competition Act, 2002 [6] SEBI (Issue of Capital and Disclosure Requirements) Regulations [7] SEBI (Listing Obligations and Disclosure Requirements) Regulations [8] SEBI (Substantial Acquisition of Shares and Takeovers) Regulations