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Exemptions for Private Limited Companies

The introduction of Companies Act of 2013 has made a significant impact in the corporate world with the addition of new provisions to ease doing business in India. However, the new Act had withdrawn several exemptions enjoyed by private limited companies in Companies Act of 1956, leaving the private limited companies to comply with several requirements. This article gives an overview of the exemptions granted to Private Limited Companies under the modified act.

Based on the feedback and concerns raised by the related persons and experts, the Act is further amended several times relaxing few provisions therein, aiming for a business-friendly India.

A notification made on 05th June 2015 notified exemptions for private companies from certain provisions of the Companies Act 2013. This notification was issued by exercising the powers conferred to the Central Government by clauses (a) and (b) of section 462(1) and in pursuance of section 462(2) of the Companies Act, 2013. The Ministry of Corporate Affairs has also amended Companies (Incorporation) Rules 2014 several times and is now with its fifth amendment which came into force on January 1, 2017.

The article here discusses the exemptions available for a private company based on the notification made on June 2015.

 

Highlights

 

In the Companies Act of 2013, the minimum paid up Capital requirement for a Private Limited Company was Rs.1 lakh. The same has been amended, and at present, there is no minimum paid up capital for a Private Limited Company

The exemptions made available through the notification are related to the following provisions

  1. Related Party Transactions
  2. Share Capital
  3. Public Deposits
  4. Meeting Requirements
  5. Resolutions and Agreements
  6. Auditor Eligibility
  7. Directors
  8. Power of Board
  9. Senior Management Appointment

1)    Related Party Transactions

As per the Companies Act of 2013, the companies are required to obtain board approval or a special resolution with shareholder consent with regards to the related party transactions.

The Act is amended for private companies as the the definition of the term “related party” provided in clause (76) of section 2 has been changed in relation to section 188 of the Companies Act whereby transactions of a private company with exempted entities will not be considered to be a "related party transaction" and will not require compliance with the provisions of Section 188 of the 2013 Act.

 

Accordingly, any contract or arrangement made between a private company and the exempted entities such as a holding company, subsidiary companies, associate companies and subsidiaries of a holding company to which such private company is also a subsidiary shall not require approval from Board of Directors or a shareholder approval in some cases.

 

In other words, the private company is not required to comply with the provisions of section 188 of CA 2013 for such transactions.

It is important to note here that though exempted entities are excluded from the definition of ‘related party’, the Director, Key Managerial Personnel of holding company or their relatives are to continue to be in the scope of related party.

Also, the transaction between the private companies where the directors or managers are in the same capacity in another, are considered as a related party transaction despite the exemption granted under Section 2(76)(viii).

Moreover, the compliance requirements on disclosure of related party transactions shall continue to apply to a private company.

Additionally, the provisions existed under Section 188 of the Act with regard to the restrictions on related party shareholders has been lifted, and such related parties are permitted to vote at a general meeting of shareholders for a resolution to approve any contract or arrangement between the company and a related party.

Impact of the exemption: The exemption helps a private limited company to not consider any transactions entered into by a private company with its holding company, subsidiary company, associate company or a fellow subsidiary company as related party transaction.

Permission for related parties voting is a big relief to the 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.
 

2)    Share Capital

According to Section 43 of the Companies Act, 2013, the Companies are allowed to have only two kinds of shares, equity shares and preference share capital.

The equity shares with or without differential rights to dividend, voting was allowed, subject to conditions.

As per Section 47 of the Act, the equity shareholders shall be entitled to vote on all resolutions, whereas the preference shareholders are qualified to vote only on resolutions which would affect their rights or are in relation to winding up or reduction of capital of the Company as prescribed under the 2013 Act.

The exemption to the Act provides that both the above-mentioned clauses are not applicable to a private company if the memorandum of association or the articles of association of such private company provides so.

Accordingly, the private company may have any kind of share capital in accordance with their articles. In other words, a private limited company is free to issue any kind of shares subject to their charter documents providing for it.

 

Impact of the exemption: The relaxation would aid private limited companies looking to raise capital and issue special classes of shares to investors. According to experts, the relaxation would evade difficulties in structuring shares and would earn priority on dividend, liquidation and entitlement to vote on an as-if-converted basis. It is expected that the exemption would also help in structuring returns and liquidation preference to foreign investors.

 

According to Section 62 of the 2013 Act, the offer period for a rights issue of shares should be limited to a minimum of 15 days and maximum of 30 days from the date of opening of the offer. In addition, an offer shall be intimated to the existing shareholders by dispatching the offer letter in respect of the rights issue through speed post or registered post or electronic mode at least 3 days before the date of opening of the issue.

As per the exemption notified, the requirement for notification of offer and the period for the offer were relaxed for private companies. Accordingly, with regard to right issue of shares, a period lesser than that specified for minimum offer period and period for dispatch of rights issue offer letter can be adopted if at least 90% of the shareholders have given their consent in writing or electronic mode.

Impact of the exemption: - The private limited companies are aided with minimum complying requirements under the Section, as the amendment provides the companies to meet their funding requirements at a shorter notice.

In addition, as per Section 62(1)(b) of the Act, it was mandatory to get the  approval of the members of the company through a special resolution for the issuance of Employee Stock Option Schemes(ESOPs). The exemption to the clause is the that the private companies can approve ESOPs by way of an Ordinary Resolution

Impact of the exemption: - The exemption eases the process of issuance of ESOPs to employees of private companies

According to Section 67 of the Act, Companies limited by shares, companies limited by guarantee and share capital can buy its own shares. The exemption notified states that the restrictions on purchase by company or giving of loans by it for purchase of its shares shall not apply to a private company, subject to the following conditions:

1)     no other body corporate has invested any money in share capital of the Company.

2)      Borrowing from banks, Financial Institutions or Body corporate is less than twice of its paid up capital or Rs. 50 crore, whichever is lower; and

3)     such a private company should not have defaulted in repayment of borrowings as may be existing on the date of the transaction under the section

Impact of the exemption: As per the notification, the private companies are exempted to comply with Section 67 of the Act, subject to the conditions, implied that the private limited company may buy its own shares without consequent reduction in capital.
 

3)    Public Deposits

According to the Companies Act of 2013, the companies are permitted to accept deposits from its members subject to fulfilment of certain conditions as per provisions of Section 73 of the Act relating to acceptance of deposits viz. circular about financial position, credit rating, deposit repayment reserves, deposit insurance and certification etc.

The exemption notification stated that the provisions under Section 73 of  the Act shall not shall not be applicable to private limited companies accepting deposits from members which are less than 100% of its paid up share capital and free reserves.

On the other hand, such exempted private companies are required to file the details of such deposits from members with the Registrar of Companies in such manner as may be specified.

In addition, an amendment on Companies (Acceptance of Deposits) Second Amendment Rules 2015 made on 15th September, 2015 exempted deposit received from the relative of director of private company provided such relative furnish a declaration that the amount is not being given out of funds acquired by him by borrowing or accepting loan or deposits from others and that the company shall disclose money so accepted in the Board’s Report.

Impact of the exemption: As per the exemption the private companies are aided to raise fund, loans etc very easily
 

4)    Meeting requirements

The provisions under the Act with regard to procedures for convening general meetings for a private limited were not separately disclosed in the Companies Act of 2013. The provisions were available under the Companies Act of 1956 for deciding its own procedure in respect of conduct of its general meetings.

The amendment made to the Companies Act of 2013 restored the powers of private companies to decide their own procedure for conducting general meetings by incorporating the provisions in their articles of association.

The relevant provisions for such amendment applicable are for notice of general meeting in Section 101, statement to be annexed to notice in Section 102, quorum for meeting in Section 103, chairman of meetings in Section 104, proxies in Section 105, restriction on voting rights in Section 106, voting by show of hands in Section 107 and not to the least the demand for poll in Section 109. As per the amendment the above mentioned provisions shall not apply to the private companies.

Impact of the exemption: As per the exemption the private companies are aided with flexibility to decide their own procedure for conducting general meetings by incorporating the provisions in their articles of association. Hence, the private companies need to suitably amend their articles and stipulate required provisions in the same.
 

5)    Resolutions and Agreements

As per Section 117 (3)(g) of the Companies Act of 2013, the companies are required to file copies of Board Resolutions passed in certain matters connected with 179(3) of the Act with Registrar of Companies.

As per the exemption, the private companies are exempted from filing such resolutions and agreements with ROC. Accordingly, the resolutions connected with making calls on unpaid shares, security buy back authorization, issuance of securities and debentures, company’s fund investment, granting of loans, guarantee or security for loans, financial statement approval diversification, acquisition or takeover of another company and any other matters with regard to Rule 8 of amended Companies (Meetings of Board and its Powers) Rules, 2014 are not required to file with ROC.

In short, the private companies are exempted from filing MGT-14 with ROC on various provisions under section 179(3) and rule 8 of amended Companies (Meetings of Board & its powers) Rules, 2014.

Impact of the exemption: With the exemption, the private limited companies are free from general meeting compliance requirements and hence the public access to Board Meeting proceedings of a private company is restricted.
 

6)    Auditor Eligibility

According to Section 141 (3) (g) of the Companies Act of 2013, the auditor who is in full time employment elsewhere or in the capacity as auditor of more than 20 companies at the date of appointment or reappointment shall not eligible to be appointed as auditor of the company.

The restriction is applicable to auditing firms, partner or a partnership firm. The Exemption Notification has modified this restriction. The appointment of a person as an auditor of one person companies, dormant companies, small companies; and private limited companies having a paid up share capital of less than Rs. 100 Crore may appoint its Auditor irrespective of the limit of 20 audits provided under section 141(3)(g) of the Act.

Impact of the exemption: With the exemption, the private limited companies are allowed to retain the same statutory auditor. Moreover, the exemption is a relaxation to the auditing firms to expand their professional expertise by enhancing their business reach with more and more private companies.
 

7)    Directors

The exemptions made available to the private limited companies with regard to the Directors can be discussed under

A.      Appointment of Directors

B.      Interested Directors’ Participation in meeting

C.      Loan to Directors

A.     Appointment of Directors

According to Section 160 of the Act, the person wishes to stand for directorship is required to deposit Rs.1 lakh and to serve a 14 day notice with regard to such intention for directorship.

The same is not applicable for retiring directors. The Act is amended by lifting this requirement and a person for directorships in private companies can stand in for directorship without serving the notice of 14 days and a deposit of ₹ 1 lac. However, the rights for retiring directors continue to be as earlier.

According to Section 162 of the Act, the appointment of two or more directors has to be voted individually and a single resolution will not take into account if any such is ratified unanimously by all the shareholders.

Such restriction under Section 162 has been lifted for private limited companies and no such approval is required for the appointment of directors.

Impact of the exemption: With these exemptions, the private limited companies require less compliance with regard to the appointment of directors.
 

B.     Interested Directors’ Participation in meeting

According to Section 184(2) of the Act, the director or directors of a company were required to reveal his nature of interest with the company with whom a contract and arrangement is entered if he is directly or indirectly is in association with that company.

Such Director is also restricted to participate in the meeting of Board discussing such contract or arrangement. The clause in the Companies Act made it difficult to many private companies to comply with, particularly in companies having two directors and either one or both of them are interested

The restriction is particularly for those directors having interest directly or indirectly with a body corporate in which such director or such director in association with any other director, holds more than two per cent shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate or with a firm or other entity in which, such director is a partner, owner or member.

 

The exemption notification resolves the issue by allowing participation of interested director of a private limited company in the board meeting after disclosing interest.

 

It is important to note that the relaxation is subject to the director providing disclosures of his interest in the prescribed form before he/ she participates in the meeting.

Impact of the exemption: With these exemptions, the private limited companies overcome the peculiar compliance issues connected with related party contracts.

C.      Loans to Directors

According to Section 185 of Companies Act of 2013, the company is not allowed to grant loans to any of its directors or to any other person in which the director is interested.

The Section also restricts the company to provide any guarantee or security in connection with any loan obtained by the directors or related parties.

The exemption notification permitted private companies for granting such loan subject to the conditions applicable for the purpose of exemption to private limited companies from the provisions of Section 73 and are detailed as follows:

a) No other body corporate shareholder in the lending company;

(b) if the borrowings of such a company from banks or financial institutions or anybody corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower;

(c) Such a company has no default in repayment of such borrowings subsisting at the time of making transactions

 

8)    Power of Board

According to Section 180 (1) of the 2013 Act, the Board of Directors of a company are required to obtain approval of shareholders at a general meeting through a special resolution for certain transaction including sale, lease or disposal of the whole or substantially whole of the undertaking of the company, investment of the amount of compensation received by the company as a result of merger or amalgamation in trust securities, borrowing money exceeding the aggregate of the company’s paid-up share capital and free reserves and remittance or granting time for the repayment of, any debt due from a Director. As per the exemption notification, the private limited companies are exempted from obtaining such approvals.

Impact of the exemption: With these exemptions, the private limited companies can avoid unnecessary delays in obtaining shareholders’ approval and thereby facilitating ease of operation.
 

9)   Senior Management Appointment

According to Section 196 (4) of the Companies Act of 2013, an approval of shareholders at a general meeting is required for the appointment of the Managing Director, Whole time Director or Manager. The appointment is also subject to the terms and conditions specified in Schedule V of the 2013 Act.

If the company failed to comply with Schedule V requirement then it is required to obtain approval from the central government for such appointment. The company is also required to file a return of such appointment with the ROC in the prescribed format.

According to Section 196(5) of the Act which deal with the validating actions states that the appointment of the Senior Management by the board of director is not approved by the shareholders, such non-approval shall not result in the actions of the Senior Management prior to the general meeting becoming invalid.

Pursuant to the exception, both the above mentioned sections and the provisions therein are not applicable to private companies. Thus, in case of private companies the appointment or remuneration of the Managing Director, Whole time Director or the Manager does not require approval at the Board Meeting/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 Act.

 Impact of the exemption: With these exemptions, the private limited companies are flexible in appointment of directors and worries on compliance requirements are quashed.

Company Seal: Apart from the above, as per the Companies Act of 2013 the requirement for common seal to be affixed on certain documents such as bill of exchange, share certificates etc are made as optional pursuant to the exemption. As per the exemption notification, common seal requirement on all such documents shall be replaced with the signature of two directors or one director and a company secretary of the company.
 

To Conclude

In India, most of the companies registered as start-ups are in the structure of private limited companies. With its recent updation in budget 2017-18 for several relaxations for Start-ups companies, it is obvious that the government is in its wide expectations to build the economic growth in India through start-ups.

Make in India is another objective put forward by the Government to revamp the growth of Indian economy.

The exemptions made are in view to provide ease of operation for such companies, rather getting stuck with compliance requirements




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