Download Exemptions to Private Companies

Impact of Recent Exemptions to
Private Companies
BY
P.K.MITTAL
B. Com, LLB, FCS
ADVOCATE
DELHI HIGH COURT
PAST CENTRAL COUNCIL MEMBER – THE INSTITUTE OF COMPANY
SECRETARIES OF INDIA.
CHIEF ADVISOR :
PKMG LAW CHAMBERS
Mobile 9811044365,9911044365
011-22540549,
EXEMPTION NOTIFICATION
• In exercise of its powers u/s 462(1)(a), 462(1)(b)
and in pursuance of section 462(2) the Central
Government vide notification dated 5th June, 2015
has granted certain exemptions to private
companies from the applicability of certain
provisions of the Companies Act, 2013.
•
It is intended to bring ease in doing business and
to provide a simpler and easier legal frame work
for the Private Companies to function.
•
The notification takes effect on and from 5th
June,2015.
•
The exemptions, exceptions, modifications
and
adaptations
granted under the notification are
prospective in nature.
• A statute which affects substantive rights is presumed
to be prospective in operation unless made
retrospective either expressly or by necessary
amendment. SHYAM SUNDAR Vs. RAM KUMAR,
MANU/SC/0405/2001.
•
Any transaction entered into by a private
company prior to the date of enforcement of the
notification will not be covered by the reliefs
granted under the notification.
• Section 6 of General Clauses Act, DEVI MULTIPLEX
Vs. STATE OF GUJARAT, MANU/SC/0607/2015.
• VARDHAMAN PUBLISHERS Vs.
MATHRABHUMI PRINTING PUBLISHING CO. LTD.,
MANU/KE/0096/1990.
• The private companies, while complying with the
specified
exceptions,
modifications
and
adaptations shall ensure that the interests of their
shareholders are protected.
•
The notification applies to private companies as
defined u/s 2(68) of the Companies Act, 2013.
As per Section 2(68) :
“private company” means a company having a minimum
paid-up share capital of one lakh rupees* or such higher
paid-up share capital as may be prescribed, and which by
its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the
number of its members to two hundred
(iii) prohibits any invitation to the public to subscribe for
any securities of the company.
*the figure of minimum paid up capital of rupees one lakh has been deleted vide
Companies Amendment Act,2015.
The notification does not apply to a
private company which is a subsidiary
of a public company as such a
company is deemed to be a public
company within the definition of
“public company” u/s 2(71) .
Broadly, the exemptions relate to:
•
•
•
•
•
•
•
•
•
Certain exemptions for entering into related party
transactions.
Relaxation with regard to the kinds of share capital and voting
rights.
Shorter period for offering securities to members through
right offers.
Simple majority for issue of employee stock option plans.
Acceptance of deposits from members eased.
Relaxation of provisions relating to general meetings.
Requirement of mandatory consent of shareholder for certain
transactions omitted.
Participation of interested directors in the board meetings.
Loans to directors permitted subject to conditions.
(1)
CHAPTER I, SUB CLAUSE (VIII) OF CLAUSE (76) OF
SECTION 2 : SHALL NOT APPLY WITH RESPECT TO
SECTION 188
Sec. 2(76)(viii) provides that a “related party” with
reference to a company meansany company which isA. a holding, subsidiary or an associate company of
such company; or
B. a subsidiary of a holding company to which it is
also a subsidiary;”
RELAXATION
With respect to Section 188, a private company shall not
be deemed to be a related party of :• its holding, subsidiary or an associate company;
• a subsidiary of a holding company to which the private
company is also a subsidiary
[subsidiaries of a common parent]
THEREFORE,
Any contract or arrangement by a private company with:• its holding, subsidiary or an associate company; or
• a subsidiary of a holding company to which the private
company is also a subsidiary
shall not be treated as a “related party transaction” and will not
require approval u/s 188.
Note:Although Holding company is excluded but
Director(other than independent Director),
KMP of holding company or their relatives are
still included in definition of Related Party.
[Section 2(76)(ix)]
RULE 15 of Companies(Meetings and Powers
of the board) 2014 needs to amended in light
of the above exemption granted. The words
‘except private company’ are required to be
added.
(2)
CHAPTER IV, SECTION 43 AND SECTION 47:
SHALL NOT APPLY WHERE MEMORANDUM OR
ARTICLES OF ASSOCIATION OF THE PRIVATE
COMPANY SO PROVIDES.
• Section 43 deals with “Kinds of Share Capital”
• Section 47 deals with “Voting Rights of
shareholders on resolutions” .
RELAXATION
• Private Companies will have full flexibility in
structuring their share capital.
• The private companies MAY have only one kind of
share capital say preference share capital OR can
issue equity shares with differential rights without
compliance of following conditions as specified under
Rule 4 of the Companies (Share Capital and
Debentures) Rules, 2014:
 Authorization by Ordinary Resolution (OR).
 Aggregate of shares with differential voting rights
shall not exceed 26% of the total post issue paid up
equity share capital .
 Distributable profits for the last three years.
 Not defaulted in filing financial statements and
annual returns for three financial years.
 No subsisting default in the payment of a declared
dividend, matured deposits and redemption of
preference shares or debentures.
 Not defaulted in payment of dividend or term loan.
 Not penalized by the court or the tribunal during the
last three years.
• The private companies can determine voting rights
of its equity and preference shareholders in any
manner it desires by incorporating suitable provision
in its memorandum or articles of association.
•
The exemption may boost investments as it gives
freedom to private companies in case of joint venture
or private equity funding to structure the capital and
voting rights.
•
Companies Act, 2013 read with Rules restricted the
ability of private companies in issuing shares with
differential rights by prescribing conditions related to
quantum, past performance and past compliance
among others. After the Notification private
companies need not comply with such conditions, if
permitted to do so by their memorandum or articles.
RULE 3 OF COMPANIES(SHARE CAPITAL
AND DEBENTURE)RULES,2014 MAY BE
AMENDED TO DELETE ‘(b)’ i.e. ‘all private
companies’.
(3)
CHAPTER IV, SUB CLAUSE (i) OF CLAUSE (a) OF
SUB SECTION (1) AND SUB SECTION (2) OF
SECTION
62:
SHALL
APPLY
WITH
MODIFICATIONS.
Section 62(1)(a)(i) deals with Time Period of Offer for
Rights Issue.
Section 62(2) deals with Time period of dispatch of
offer letter under Rights Issue.
• Section 62(1)(a)(i) provides that the time period of
offer for rights issue shall not be less than 15 days
and not more than 30 days from the date of offer
within which the offer, if not accepted, shall be
deemed to have been declined.
• It has been modified to provide that in case 90% of
the members of a private company have given their
consent in writing or in electronic mode, the periods
lesser than those specified in the said sub-clause or
sub-section shall apply.
Note:- The time limits cannot be increased, they can only be
reduced.
RELAXATION
•
A private company need not wait for minimum 15
days and may close its offer for rights issue in less
than 15 days period [the period may be reduced to
less than 15 days but can not be extended beyond
30 days].
• The notice for making the rights offer may be
dispatched in less than 3 days period before opening
of the issue.
• A private company may now open and close its
rights offer the same day.
(4)
CHAPTER IV, CLAUSE (b) OF SUB SECTION (1) OF
SECTION 62 : WORDS “SPECIAL RESOLUTION” TO
BE SUBSTITUTED BY WORDS “ORDINARY
RESOLUTION”.
Section 62(1)(b) deals with Rights offer to
Employees under ESOP.
•
Section 62(1)(b) provides that Rights Offer shall be
made to employees under a scheme of employees’
stock option by passing a special resolution.
•
In case of a Private Company, the requirement of
passing a special resolution has been done away
with and only a ordinary resolution is now
sufficient.
RELAXATION
A Private Company can now make rights offer to its
employees under a scheme of employees’ stock option
by passing ordinary resolution. The requirement of
special resolution has been done away with.
RULE 12 OF COMPANIES(SHARE CAPITAL
AND
DEBENTURE)RULES,2014
MAY
ACCORDINGLY
BE
AMENDED
TO
INCORPORATE THE ABOVE EXEMPTION.
i.e. in sub rule (1) the words ‘special
resolution’ should be substituted with
“ordinary resolution’.
(5)
CHAPTER IV , SECTION 67: SHALL NOT
APPLY TO CERTAIN PRESCRIBED PRIVATE
COMPANIES.
Section 67 deals with Restrictions on
purchase by company or giving loans by it
for purchase of its own shares.
Section 67 shall not apply to Private Companies
:(a) in whose share capital no other body corporate has
invested any money;
(b) if the borrowings of such a company from banks or
Financial Institutions or any body corporate is less
than twice its paid up share capital or 50 crore
rupees, whichever is lower; and
(c) such a company is not in default in repayment of
such borrowings subsisting at the time of making
transactions under this section.
Section 67 provides that
• No company limited by shares and having a share
capital shall have power to buy its own shares unless
the consequent reduction of share capital is effected
under the provisions of the Act.
• No company shall give, directly or indirectly, any
financial assistance for the purpose of purchase of its
own shares.
RELAXATION
The above provision does not apply to above
mentioned private companies and such
companies may now buy its own shares .
(5)
CHAPTER V, CLAUSES (a) TO (e) OF SUB SECTION
(2) OF SECTION 73 : SHALL NOT APPLY TO
PRIVATE COMPANIES, ACCEPTING FROM ITS
MEMBERS MONIES NOT EXCEEDING 100% OF
AGGREGATE OF THE PAID UP SHARE CAPITAL
AND FREE RESERVES.
Section 73(2) clauses (a) to (e) deals with the
conditions for acceptance of deposits by
company from its members.
Conditions (a) to (e) of Sec 73(2) shall not apply
to a Private Company:-
• Issuance of a circular to members;
• Filing a copy of circular with ROC in 30 days;
• Deposit 15% amount in a separate bank a/c;
• Providing deposit insurance;
• Certifying that company has not committed
any default in repayment of deposits/interest
RELAXATION
A Private Company may accept from its
members deposits up to 100% of aggregate of
the paid up share capital and free reserves
without fulfilling conditions (a) to (e) u/s 73(2).
But,
The Private Company shall file details of deposits
so accepted to the Registrar.
MCA may modify Rule 3(3) of the Companies (Acceptance of Deposits)
Rules, 2014, which states that maximum amount of deposit that a
company may accept from its members shall not exceed 25% of its
paid-up share capital and free reserves.
(7)
CHAPTER VII , SECTIONS 101 TO 107 AND SECTION
109 : SHALL APPLY UNLESS OTHERWISE SPECIFIED
IN RESPECTIVE SECTIONS OR THE ARTICLES OF THE
COMPANY PROVIDE OTHERWISE.
•
•
•
•
•
•
•
•
Notice of general meeting (u/s 101)
Statement to be annexed to notice (u/s 102)
Quorum for meetings (u/s 103)
Chairman of meetings (u/s 104)
Proxies (u/s 105)
Restriction on voting rights (u/s 106)
Voting by show of hands (u/s 107)
Demand for poll (u/s 109).
RELAXATION
Private Companies now have the option to provide
for their own regulations with respect to notice of
general meeting, statement to be annexed to
notice, quorum for meetings, chairman of
meetings, proxies, restriction on voting rights,
voting by show of hands and demand for poll to the
exclusion of the corresponding provisions of the
Companies Act, 2013
It will provide substantial relaxation in
administration of general meetings.
(8)
CHAPTER VII, CLAUSE (G) OF SUB SECTION (3)
OF SECTION 117 : SHALL NOT APPLY.
• Section 117(1) provides that a copy of every
resolution in respect of matters specified in subsection (3) shall be filed with ROC within 30 days of
passing of the resolution.
• Section 117(3)(g) specifies “ resolutions to be filed
with the Registrar passed in pursuance of subsection (3) of section 179”
Section 179(3) provides that Board shall exercise
certain powers by means of a resolution passed at
meeting of the Board:• Make calls on the shareholders
• Issue securities
• Borrow monies
• Invest funds of the company
• Approve financial statements
• Approve merger, amalgamation
Private companies have now been exempted from
provisions of Section 117(3)(g)
RELAXATION
• The requirement of filing Form No. MGT. 14 for
resolutions passed by the Board in exercise of its
powers u/s. 179(3) is no longer applicable to a
private company.
It is a major relief as private company board minutes
are a internal matter for the company and the filing
requirement was perceived as a huge compliance
burden.
(9)
CHAPTER X, CLAUSE (g) OF SUB SECTION (3) OF
SECTION 141 : SHALL APPLY WITH MODIFICATIONS
• Section 141(3) deals with conditions for eligibility for
appointment as an auditor of a company.
• Section 141(3)(g) limits the number of audits by an
auditor to twenty companies.
Now the words “other than One person companies,
dormant companies, small companies and private
companies having paid-up share capital of less than Rs
100 crores” have been inserted after twenty companies.
RELAXATION
•
While computing the limit of 20 companies, the one
person companies, dormant companies, and the
private companies with the paid up share capital of
less than rupees 100 crores will be excluded.
•
A Private Company having paid-up share capital of
less than Rs 100 crores may appoint its Auditor
irrespective of the limit of 20 audits provided u/s
141(3)(g).
•
It provides flexibility to a private company in
appointment of its auditor.
(10)
CHAPTER XI, SECTION 160 : SHALL NOT
APPLY
Section 160 deals with right of persons other
than retiring directors to stand for directorship
subject to 14 days notice in writing before the
meeting along with the deposit of Rs. one lac.
RELAXATION
•
Private companies are free to include suitable
provision in their AOA for eligibility of a person
(other than retiring director) to be appointed as
director of the company.
•
Persons other than retiring directors may now stand
for directorships in such companies:without leaving a written notice, 14 days before
the meeting; and
without deposit of Rs. one lac.
(11)
CHAPTER XI , SECTION 162 : SHALL NOT APPLY
Section 162 deals with appointment of
directors to be voted individually.
RELAXATION
Private Companies are exempted from Section 162 and
can now move a motion at its general meeting for
appointment of two or more persons as directors of the
company by a single resolution.
(12)
CHAPTER XII, SECTION 180 : SHALL NOT
APPLY
Section 180 provides that the Board shall exercise
certain powers only with the consent of the company
by a special resolution:
• To sell, lease or dispose of the whole or substantially
the whole undertaking;
• To invest otherwise in trust securities the
compensation for merger or amalgamation;
• To borrow money in excess of aggregate of paid up
share capital and free reserves;
• To remit, or give time for repayment of any debt due
from a director.
RELAXATION
The Board of Directors of a private
company may exercise the above
mentioned powers without restrictions u/s
180 i.e, without obtaining the consent of
the company by a special resolution.
(13)
CHAPTER XII, SUB-SECTION (2) OF SECTION 184:
SHALL APPLY WITH THE EXCEPTION THAT THE
INTERESTED DIRECTOR MAY PARTICIPATE IN
SUCH MEETING AFTER DISCLOSURE OF HIS
INTEREST
• Section 184 deals with disclosure of interest by
director.
• Section 184(2) prohibits interested director from
participating in the Board meeting.
RELAXATION
Now in a private company an interested director may
participate in a board meeting after disclosing his
interest.
Although, this provision will certainly lead to ease of
decision making by private companies, there seems to
be some anomaly. Such an interested director may
participate in a Board meeting of a private company
after disclosure of his interest but he cannot be
counted for the purpose of ascertaining quorum under
section 174(3).
(14)
CHAPTER XII, SECTION 185 : SHALL NOT APPLY
SUBJECT TO CERTAIN CONDITIONS
Section 185 provides that no company shall
advance any loan to any of its directors or to
any other person in whom the director is
interested.
Section 185 shall not apply to a private company if the
following conditions are fulfilled:
(a) in whose share capital no other body corporate has
invested any money;
(b) if the borrowings of such a company from banks or
Financial Institutions is less than twice of its paid up
share capital or Rs. 50 crores, whichever is lower;and
(c) such a company has no default in repayment of such
borrowings subsisting at the time of making
transactions u/s 185.
RELAXATION
Now, private companies fulfilling specified conditions
can advance loan to any of its directors or to any other
person in whom the director is interested.
It can also give guarantee or provide any security in
connection with any loan taken by any of its directors or
to any other person in whom the director is interested.
(15)
CHAPTER XII, SECOND PROVISO TO SUBSECTION (1) OF SECTION 188
The second proviso to Section 188(1) which
provides as under shall not apply to a private
company.
“Provided further that no member of the
company shall vote on such resolution to
approve any contract or arrangement which
may be entered into by the company, if such
member is a related party”.
RELAXATION
A special feature inserted in respect of RPTs is that in
general meeting for approval of a related party
transaction, a member who is a related party is not
allowed to vote on such a resolution. This provision shall
not apply in case of private companies.
If a private company enters into any contract or
arrangement with a related party requiring prior approval
of the company, the related parties are now allowed to
vote on such a resolution.
This is a big relief to private companies as having disinterested members was
not at many times possible in private companies where there are few
members who are mostly related to each other.
(16)
CHAPTER XIII, SUB SECTION (4) AND (5) OF
SECTION 196: SHALL NOT APPLY
• Section 196(4) deals with approval of the terms and
conditions of appointment of managerial personnel
by
board
meeting/general
meeting/central
government as the case may be.
•
Section 196(5) deals with validating actions of
managerial personnel , if the appointment is not
approved by a company in general meeting.
RELAXATION
In case of a private company, appointment of a
managing director, whole-time director or manager and
the terms and conditions of such appointment and
remuneration payable does not require the approval at
the General meeting and subsequently the approval of
Central Government is also not required, even if the
conditions for appointment are not as per the
requirements of Schedule V of the Companies Act 2013.
Private companies have a critical role
to play in the growth of the economy.
The exemption notification for private
companies is a much awaited one.
With these exemptions, it is expected
that many companies would be able
to carry on their businesses with
ease.
Thank you