Journey of a Business – Case Study

Chapter 1: Sole Proprietorship

Starting a new business

Arjun Sharma, a passionate food enthusiast from Jaipur, started “Arjun Spices” in 2015 as a small sole proprietorship. In a proprietorship, there is only one owner who controls the entire business, takes all the profits, and also bears all the risks and losses.

Arjun would personally buy raw spices from local farmers, grind and blend them according to his secret recipes, and sell them in the city’s wholesale market. His personal savings funded the business, and there was no legal separation between Arjun’s personal wealth and the business assets.

For example, if Arjun’s business earned ₹5 lakh profit in a year, it was his personal income. But if the business suffered a ₹3 lakh loss, Arjun would have to pay that from his own pocket — even if it meant dipping into his personal savings or selling personal assets.

The advantages for Arjun were:

Full control over all decisions.
Simple setup with minimal legal formalities.
All profits belonged to him.

The disadvantages were:

Unlimited liability — his personal assets were at risk.
Limited access to funds — growth depended mainly on his own savings.
Business continuity risk — if something happened to him, the business would likely stop.

At this stage, “Arjun Spices” was well-known in the local market, but Arjun soon realized that to expand into other cities, he would need more capital and possibly another skilled person to help him scale up. This set the stage for the next big change in his business journey.

Chapter 2: Partnership Deed

Bringing in a Partner & Drafting a Partnership Deed (Arjun Spices)

As Arjun’s spice business grew, orders started pouring in faster than he could fulfill them. Managing suppliers, grinding spices, packaging, marketing, and bookkeeping became overwhelming. Arjun realized he needed help — not just an employee, but someone who could share the responsibility, bring in new ideas, and invest capital.

So, he approached his cousin Ravi, who had experience in wholesale distribution. Ravi agreed to join the business, but instead of becoming just an employee, they decided to formalize their relationship as partners. This way, both could share profits, losses, and decision-making power.

They drafted a Partnership Deed, a legal document outlining their agreement. Some common terms included:

Capital Contribution – Arjun invested ₹5 lakh worth of existing stock and equipment; Ravi invested ₹5 lakh in cash for working capital.
Profit & Loss Sharing Ratio – They agreed on a 50:50 split.
Duties & Responsibilities – Arjun handled sourcing and production; Ravi took care of sales and distribution.
Decision-Making – Major decisions (like expansion or taking loans) required mutual consent.
Withdrawal of Capital – Neither partner could withdraw their capital without mutual agreement.
Dispute Resolution – In case of disagreements, they would seek arbitration before going to court.
Duration of Partnership – The partnership would continue until mutually dissolved.

With the deed signed, stamped, and registered, “Arjun & Ravi Spices” was born. This move allowed them to pool resources, scale operations, and share the risks — setting the stage for bigger growth.

Chapter 3: Limited Liability Partnership (LLP)

Converting Arjun Spices into an LLP

After two successful years as a partnership firm, Arjun Spices had grown beyond their local market. Arjun handled procurement and product quality, while Ravi focused on marketing, sales, and building distribution channels. Together, they had managed to get their spices into supermarkets across two states.

However, with growth came new challenges:

They needed bigger working capital to fund bulk purchases in the harvest season.
They wanted to hire experienced managers and invest in modern packaging machinery.
More importantly, they realized that as a partnership, they were personally liable for all debts of the business. If something went wrong, their personal houses and savings could be at risk.

Why convert to LLP?
An LLP allowed them to:

Limit their personal liability — Creditors could claim only the business assets, not their personal ones.
Retain flexible management — They could still decide day-to-day operations without the rigid structure of a company.
Maintain tax benefits — LLPs are taxed differently from companies, which suited them in the short term.
Attract future investors — LLPs had better credibility than a standard partnership, and banks were more comfortable lending to them.

How they converted
With the help of a Chartered Accountant, they:

Registered the LLP name as Arjun Spices LLP on the MCA (Ministry of Corporate Affairs) portal.
Drafted the LLP Agreement defining:
- Capital contribution from Arjun and Ravi (₹10 lakh each).
- Profit-sharing ratio (still 60:40 in favour of Arjun as agreed earlier).
- Roles and responsibilities — Arjun as Managing Partner for operations, Ravi for sales & marketing.
- Dispute resolution methods and exit clauses.
Filed necessary forms (Form 2 & Form 3) with the MCA and got the LLP Incorporation Certificate.

By converting into an LLP, they not only protected themselves from unlimited liability but also gave Arjun Spices a more professional standing — setting the stage for larger expansion and attracting outside capital in the future.

Chapter 4: Private Limited Company (PLC)

Converting Arjun Spices LLP into PLC

After running Arjun Spices LLP for three more years, Arjun and Ravi had achieved a strong market presence in five states. Their products were now available in major retail chains, and their brand had started gaining national recognition. However, big growth dreams require big money — they wanted to set up a fully automated processing plant, expand pan-India, and enter the export market.

Banks were willing to lend, but only partially. To fund the full expansion, they needed equity capital from outside investors. That’s when their CA advised:

“If you want to bring in investors and give them ownership in the business, you’ll need to convert your LLP into a Private Limited Company. This structure is more investor-friendly because it offers shares as ownership units.”

Why convert to Private Limited?

Easier to raise equity — Ownership is represented by shares, which can be bought by investors.
Clear ownership and voting rights — Each share equals a proportionate stake in profits and decision-making.
Credibility with suppliers and customers — The “Pvt. Ltd.” tag signals a serious, scalable business.
Eligibility for venture capital & private equity funding — Most institutional investors only invest in companies, not LLPs or partnerships.

How they structured the new company

When registering Arjun Spices Private Limited, they had to decide:

Authorised Share Capital — The maximum value of shares the company is allowed to issue. They set it at ₹50 lakh (5 lakh shares of ₹10 face value each).
Paid-Up Capital — The actual amount paid by shareholders for the shares issued. Initially, they issued 2 lakh shares (₹20 lakh paid-up capital).
Face Value (FV) — The nominal value of each share, set at ₹10.
Shareholding — Since Arjun and Ravi brought in assets and goodwill from the LLP:
- Arjun: 1.2 lakh shares (₹12 lakh, 60%)
- Ravi: 0.8 lakh shares (₹8 lakh, 40%)

What this means in numbers

At incorporation:

Book Value of Company = Number of Shares × Face Value = 2,00,000 × ₹10 = ₹20,00,000.
This is the paid-up capital, which appears in the company’s balance sheet under “Equity Share Capital.”
This is not the valuation — that comes later when investors arrive and are willing to pay a premium.

Impact on them

Now they had a structure that could easily issue new shares to incoming investors.

But they also understood: every time new shares are issued to outsiders, their own % ownership would be diluted unless they also buy more shares.

Chapter 5: Expansion Through Fresh Shares

Primary Share Issue to “Angel Investors” or “Venture Capitalists”

Three years after forming Arjun Spices Private Limited, Arjun and Ravi were doing well — annual revenue had crossed ₹15 crore, and demand from the southern states was growing fast.

To expand operations — set up a warehouse in Hyderabad, invest in faster grinding and packing machinery, and launch TV ads in regional languages — they needed about ₹1 crore in fresh funds.

A bank loan was possible, but this time they wanted equity funding so that the repayment pressure was avoided, and an experienced investor could also guide them strategically.

Valuation & Merchant Banker’s Role

They hired a Merchant Banker to assess the company’s worth.
The banker reviewed:

Past performance – revenues, profits, brand recall
Future potential – expansion markets, product lines
Comparable companies – valuation multiples in the FMCG spice segment
Growth plan feasibility

Valuation Outcome:

Overall company value: ₹50 crore
Face Value (FV): ₹10 per share
Market Value (perceived price): ₹500 per share

At this stage, Arjun Spices had 2,00,000 shares in total (Arjun held 60% = 1,20,000 shares, Ravi held 40% = 80,000 shares).

How the Primary Issue Was Structured

To raise ₹1 crore, they decided to create and issue 20,000 new shares:

Face value = ₹10 per share
Premium = ₹490 per share
Total price per share = ₹500

Funds Raised = 20,000 × ₹500 = ₹1 crore

₹2 lakh (20,000 × ₹10) credited to Share Capital
₹98 lakh (20,000 × ₹490) credited to Securities Premium Reserve

Shareholding Before & After

Before issue:

Total shares = 2,00,000
- Arjun: 1,20,000 shares (60%)
- Ravi: 80,000 shares (40%)

After issue:

New total shares = 2,20,000
- Arjun: 1,20,000 shares → 54.55%
- Ravi: 80,000 shares → 36.36%
- Investor: 20,000 shares → 9.09%

Key Points

Promoters still retain control: Combined stake of Arjun & Ravi = ~91%
Investor becomes a minority shareholder: No risk of hostile takeover
Company gets ₹1 crore for expansion — promoters don’t pocket this money; it’s invested back into the business

Number of shares increases → ownership dilution, but proportional control is maintained

Chapter 6: Selling Shares on Grey Market

Secondary Sale of Shares by Promoters/Investors to other buyers

Two years after bringing in the minority investor, Arjun Spices Private Limited had expanded into 6 states. Revenue crossed ₹40 crore, and the company was regularly featured in FMCG industry magazines.

The early investor, who had bought 20,000 shares at ₹500 each, now saw the company’s valuation jump. The merchant banker’s fresh valuation pegged the market value at ₹1,200 per share.

Why Secondary Sale Happens

The investor wanted to:

Book some profits
Reallocate capital to a new venture
Reduce exposure while still holding some stake in Arjun Spices

What a Secondary Sale Means

In a secondary sale:

Shares are sold by existing shareholders (promoters or investors) to another buyer
The company does not issue new shares — total shares remain unchanged
The money from the sale goes to the seller, not to the company

The Deal

The investor decided to sell 10,000 shares (half of his stake) to a well-known retail distribution company looking to get a strategic foothold in Arjun Spices.

Sale price per share = ₹1,200
Total deal value = ₹1.2 crore (10,000 × ₹1,200)
Money goes directly to the investor — Arjun Spices doesn’t receive a rupee from this transaction

Shareholding Before & After the Secondary Sale

Before sale:

Arjun: 1,20,000 shares (54.55%)
Ravi: 80,000 shares (36.36%)
Investor: 20,000 shares (9.09%)

After sale:

Arjun: 1,20,000 shares (54.55%)
Ravi: 80,000 shares (36.36%)
Investor: 10,000 shares (4.55%)
New strategic shareholder: 10,000 shares (4.55%)

Total shares remain = 2,20,000

Chapter 7: Public Limited Company

Launch of IPO on stock exchange to get capital from general public

By now, Arjun Spices Private Limited was a household name in the premium spice segment, supplying to over 50,000 retail stores and having a strong online presence. Annual revenues touched ₹100 crore, with healthy profits.

The promoters, Arjun and Ravi, were ambitious. They wanted to:

Expand into international markets (Middle East & Europe)
Set up a state-of-the-art processing plant with advanced machinery
Build a national advertising campaign

This required ₹50 crore in fresh funding.

Why Not Just Take More Private Investment?

They could have brought in another private investor, but going public had bigger benefits:

Massive capital raise potential
Brand credibility — listed companies inspire public trust
Liquidity — promoters and early investors could sell shares in the future
Stock as currency — use shares for mergers/acquisitions

Legal Step – Converting to a Public Limited Company

Before approaching the stock exchange, the company had to legally change its status from Private Limited to Public Limited.

Changes required:

Remove the restriction on the number of shareholders
Remove the restriction on share transfers
Increase the authorized share capital
Add the word “Limited” instead of “Private Limited” in the name
Comply with SEBI & Companies Act norms for public companies

The new name became Arjun Spices Limited.

The Role of Investment Bankers

They hired a reputed investment bank to handle the IPO process. The banker’s job included:

Valuation — assessing fair market value of shares
Structuring the IPO — deciding how many shares to issue, at what price
Drafting DRHP (Draft Red Herring Prospectus) — detailed company information submitted to SEBI
Marketing — roadshows to attract big investors before the public sale

Primary & Secondary Components in the IPO

The IPO had two parts:

1. Fresh Issue (Primary Sale)

The company created 100,000 new shares priced at ₹500 each.
This raised ₹50 crore.
The money went directly into the company’s account to fund expansion.
After this, the total shares increased from 2,20,000 to 3,20,000.

👉 Key point: Fresh issue = new shares created, money goes to company.

2. Offer for Sale (Secondary Sale)

The early investor sold 5,000 of his 10,000 existing shares to the public.
This money went to the investor himself, not the company.
Importantly, the total number of shares did not change — it remained at 3,20,000.

👉 Key point: Offer for Sale = existing shares sold, money goes to selling shareholder.

Shareholding Before & After IPO

Before IPO (Private Limited):

Arjun: 1,20,000 (54.55%)
Ravi: 80,000 (36.36%)
Early Investor: 10,000 (4.55%)
Strategic Investor: 10,000 (4.55%)
Total = 2,20,000 shares

After IPO (Public Limited):

Arjun: 1,20,000 (37.5%)
Ravi: 80,000 (25%)
Early Investor: 5,000 (1.56%)
Strategic Investor: 10,000 (3.13%)
Public: 105,000 (32.81%)
Total = 3,20,000 shares

Listing Day

After SEBI approval, the IPO went live. Within days, it was oversubscribed 5×.
On listing day, Arjun Spices debuted at ₹650 per share on the NSE and BSE, giving it a market cap of over ₹2,000 crore.Arjun and Ravi went from being local spice traders to running a publicly listed FMCG giant.

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