Capital Raising & Corporate Debt Evaluator

1. Corporate Debt Limits: Section 180(1)(c) & Section 185

Under Section 180(1)(c) of the Companies Act, 2013, the Board of Directors of a company cannot borrow money where the proposed borrowing (together with existing aggregate debt) exceeds the sum of Paid-up Capital, Free Reserves, and Securities Premium (excluding temporary bank loans obtained in the ordinary course of business). Any borrowing contracted beyond this ceiling without a prior Special Resolution via Form MGT-14 is ultra vires the company and legally void against lenders. Furthermore, under Section 185, direct or indirect loans or guarantees to directors or interested entities are strictly prohibited unless meeting narrow commercial exemptions.

2. Private Placement Rigor: Section 42 & PAS Rules

Any offer of securities to up to 200 persons must strictly adhere to Section 42 and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. Subscription funds must originate exclusively from the subscriber's personal banking account and remain in a separate scheduled bank escrow account. Securities must be allotted within 60 days of fund receipt. Failure to allot mandates a complete refund within 15 days, beyond which penal interest at 12% per annum compounds automatically, and the transaction is deemed an illegal public deposit.

3. Cross-Border Inbound Capital: FEMA NDI & Press Note 3

Under the FEMA (Non-debt Instruments) Rules, 2019, foreign investment into permitted sectors proceeds under the 100% Automatic Route, subject to strict prohibition on assured returns or guaranteed exit prices. CCPS or CCDs providing guaranteed IRR are treated as illegal external borrowings. Under Press Note 3 (2020), any foreign inflow where the investor or beneficial owner is situated in or is a citizen of a country sharing a land border with India (e.g., China, Hong Kong) mandates prior approval from the Government of India. Allotments must be reported on the RBI FIRMS portal via Form FC-GPR within 30 days with a CA Valuation Certificate and 18-digit UDIN.

4. Direct Tax Scrutiny: Section 68 "Source of Source" Doctrine

Under the first and second provisos to Section 68 of the Income-tax Act, 1961, closely held companies issuing share capital or accepting unsecured loans bear the statutory burden of proving the identity, creditworthiness, and genuine financial source of the investor/lender (the source of source). The Supreme Court in Pr. CIT v. NRA Iron & Steel Pvt. Ltd. [2019] authoritatively held that mere production of PAN cards or bank statements is insufficient if the investor lacks real commercial capacity. Unexplained credits attract a peak penal tax of 78% under Section 115BBE.