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How Strategic Capital Infusion Can Benefit Companies Strategic capital infusion brings in strategic investors who provide the much-needed resources and share their vast experience

By Kanika Premnarayen

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In a competitive global scenario where numerous businesses are set up and wound up almost every other day, resources play an important role to set one entity apart from another.

More often than not, remaining open for business and shutting shop depend on one particular factor -- availability of resources for an enterprise to meet its goals, both commercial and in terms of nurturing the requisite human resources that would propel it further.

Using creative liberty, adage "a stitch in time (saves nine)" may be modified, in this instance, to bring strategic capital infusion within its ambit.

Two Ways of Capital Infusion

There are two ways by which strategic capital infusion may take place in a company -- the equity route or the debt route.

Under the equity route, the investor is given a percentage of shares in lieu of capital investment through the issue of fresh shares. The class of shares that are issued to an investor may either be (i) equity shares with voting rights or differential rights to dividend or voting; or (ii) preference shares, which carry a preferential right with respect to the payment of dividend and repayment, in case of winding up.

Often, investors purchase shares from existing shareholders as well. Under the debt route, a company may issue debentures and may also choose to provide security, by encumbering its immoveable and moveable property.

Of the numerous reasons why strategic capital infusion is often the game-changer, following are three key points from an equity route perspective, briefly setting out the need and justification for such infusion in companies.

Let's Talk Capital

It is no secret that companies require capital. Capital is required for day-to-day activities, for some organizations in order to even build an inventory. Not every company, in its infancy stage, meets its capital requirements on the basis of its revenue generated. There are instances when external capital is required for internal targets to be met. We have seen instances when proprietors of infant enterprises have brought in strategic or financial investors at an early stage, selling to them a part of their shareholding so that the company remains afloat, and stays on-course to meet its targets in the long run.

It is needless to say that the influx of investors also brings with it the influx of investment -- the much-needed resources for an organization. The capital may then be put to work, thereby ensuring that each rupee invested into the company yields the desired result.

Nothing Beats Experience

The thing about strategic capital infusion, by way of bringing in strategic investors, is that with such investors come vast experience. More often than not, investors in new enterprises are either retired entrepreneurs or professionals who have themselves been in the trenches of corporate resurrections for companies or as market trends reveal, are investors who invest in new enterprises based on their valuation of the business model.

Additionally, the return on the investment made by the investor is now directly co-related with the fate of the investee company. This also ensures that the investor will share the investors' depth of experience to help the company meet its targets, while at the same time, also ensuring that the investor gets more than the initial investment.

Market Synergy

In the business world, people talk, and reputations precede an individual. Getting the right strategic investment, more so by bringing aboard investors, also brings in the much-needed market synergy for an enterprise. The fact that a company is able to bring in investors speaks volumes about its potential.

In turn, such publicity results in more open doors for an enterprise to further its business activities and get more investment.

Conclusion

While naysayers may choose to dwell on the fact that strategic capital infusion via the equity route will dilute the shareholding of promoters and/ or current shareholders, there is no doubt that such investments will benefit the company in the longer run.

Enterprises thrive better when there exists a stream of resources coming in and promoters would do well to see the benefits of such investments in the long run.

Kanika Premnarayen

Partner, Indian Law Partners

Kanika is a dual qualified lawyer (registered as a non-practicing solicitor in England & Wales and as a Solicitor and Advocate in India). Kanika completed her B.A.L.L.B from Government Law College, Mumbai in 2006 and is enrolled as an advocate with the Bar Council of Maharashtra and Goa since 2006.

Kanika has also been admitted as a solicitor with the Bombay Incorporated Law Society in 2008 and as a solicitor of England and Wales in 2011 and is a member of the International Bar Association as well.
Kanika has significant experience in corporate and commercial laws focusing on mergers, acquisitions, joint ventures and private equity investments and exits across various sectors in India.

Kanika also has experience in numerous real estate transactions and has assisted and appeared in commercial litigation proceedings before the Hon’ble High Court (Mumbai), the Debt Recovery Tribunal (Mumbai), the Securities Appellate Tribunal (Mumbai) and in various arbitration proceedings.

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