Ministry of Corporate Affairs (‘MCA’) has issued four notifications, all dated 05 June 2015, and thereby granted several exemptions to Private companies, section 8 companies, government companies and nidhi companies. These notifications are issued under section 462 of the Companies Act, 2013 (‘the Act;).
This write-up is restricted to exemptions to private companies (notification G.S.R.464 (E) dated 05 June 2015).
It states that private companies, while complying with such exceptions, modifications and adaptations, as specified, shall ensure that the interests of their shareholders are protected.
Date of coming into force: 05 June 2015.
Section 462(2) of the Act requires ‘notification proposed’ shall be laid ‘in draft’ before the Parliament for a period of 30 days. The gazetted notification states that the same ‘has been’ placed before the parliament for a period of 30 days. Though it is not clear whether the notification is approved, disapproved or modified by Parliament or whether period of 30 days have elapsed without modification or disapproval, it can be presumed that period of 30 days would have elapsed after placing of ‘draft notification’ before both houses of Parliament of India. It can also be presumed that the Parliament would have either approved or would have not made any changes in the draft notification. And consequently, the ‘draft notification’ would have acquired finality.
These presumptions are drawn by me, considering fact that the draft notification is published in Official Gazette. Had it been not approved by the Parliament or said period of 30 days would not have elapsed, after its placement before the Parliament, then MCA would not have issued it in Gazette of India. This is so because, section 462(1) provides that by notification, Central Government may direct that any of the provisions of the Act (a) shall not apply to class(es) of companies or (b) shall apply class(es) of companies with notified exceptions, modifications and adaptations.
Hence, in my view, date of coming into force of exemptions to private companies is 05 June 2015.
Exemptions to private companies and its impact are given below:
| Sr. No. | Exemption provision | Impact |
|---|---|---|
| 1 | Chapter I, sub-clause (viii) of clause (76) of section 2 – Shall not apply with respect to section 188. |
Section 188(1) specifies certain types of related party transactions requires approval of Board of Directors at Board meeting, disclosure of specified matters in agenda of board meeting, interested director shall not remain present during discussion of related party transactions, and where it’s value is beyond prescribed limits, such transactions also requires prior approval of shareholders by way of a special resolution with prescribed details to be specified in explanatory statement annexed to notice of general meeting.
The exemption is given to private companies from applicability of said requirements so far as related party transactions are with holding company, subsidiary company, fellow subsidiary company or an associate company. It may be noted that section 188 is applicable to private companies for transactions with related parties specified under section 2 (76) – (other than those stated above). Hopefully, MCA will soon modify Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014. |
| 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 states companies limited by shares can have two kinds of share capital viz. equity (including equity with differential voting rights) and preference share capital. This was also provided under section 86 of the earlier Companies Act, 1956. However sections 85 to 89 of the earlier Companies Act, 1956 were not applicable to private companies [per section 90 of the earlier Companies Act, 1956].
Exemption is provided to private companies from section 43, if either its memorandum or articles of association so provides. The effect could be that private companies may have only one kind of share capital say preference share capital (though term ‘preference’ indicates that there shall be one other kind of share capital). Or private companies can issue equity shares with differential voting rights without compliance of conditions related thereto specified under the Companies (Share Capital and Debentures) Rules, 2014. Hopefully, MCA will soon modify Rule 3 of the Companies (Share Capital and Debentures) Rules, 2014. Section 47 provides voting rights equity shareholders and preference shareholders. This provision is similar to section 87 of the earlier Companies Act, 1956. As stated above, section 87 was not applicable to private companies [per section 90 of the earlier Companies Act, 1956]. Exemption is provided to private companies from section 47, if either its memorandum or articles of association so provides. The effect could be that private companies can determine voting rights of its equity shareholders and preference shareholders in any manner it desires by incorporating suitable provision in its memorandum or articles of association. It seems the exemption is given to 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. However, this exemption from section 47 is subject to section 106 of the Companies Act, 2013. Section 106 provides that company can prohibit its members from exercising his voting rights only on the ground (which shall be stated in its articles of association) that no member shall exercise any voting right in respect of the shares on which any calls or other sums presently payable by him have not been paid or in regard to which the company has a right of lien and has exercised that right. A provision similar to section 106 were in sections 181, 182 and 183 of the earlier Companies Act, 1956. However, in the process of combining these three provisions into a single provision of section 106, effect of wordings [section 106(2)] threatened the intended freedom to private companies to raise capital. However, private companies are given option to alter or omit provisions of Section 106 by making suitable provision in its articles of association. |
| 3 | Chapter IV, sub-clause (i) of clause (a) of sub-section (1) and sub-section (2) of section 62.- Shall apply with following modifications:- In clause (a), in sub-clause (i), the following proviso shall be inserted, namely:- Provided that notwithstanding anything contained in this sub-clause and sub-section (2) of this section, in case ninety per cent. 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. | For increasing paid-up share capital, companies issue further shares. Under section 62, companies need to offer its securities to its existing equity shareholders in the proportion of their shareholding in the company. Section 62 (1)(a)(i) requires companies issuing further shares to send notice along with offer letter to its equity shareholders and the offer shall remain open for subscription for minimum 15 days and maximum 30 days.
Now, relaxation is provided to private companies from requirement of Section 62 (1)(a)(i), by providing that if 90% of the members agree in writing (consent can be even by electronic mode) then the offer can be kept open for lesser than 15 days. Further section 62(2) requires notice (as aforesaid) shall be sent atleast three days before the opening of the issue. Now, relaxation is provided to private companies from section 62(2), by providing that notice can be sent even lesser than three days before the issue opens, if 90% of the members agree in writing (consent can be even by electronic mode). |
| 4 | Chapter IV, clause (b) of sub-section (1) of section 62. – In clause (b), for the words “special resolution”, the words “ordinary resolution” shall be substituted. | For offering stock options to employee’s (ESOP), consent of members by way of special resolution is required under section 62(1)(b). Now, consent of simple majority (ordinary resolution) would suffice. This relaxation is applicable to private companies as well as public companies. |
| 5 | Chapter IV, section 67. – Shall not apply to private companies –
|
Section 67 restricts companies to buy its own shares, except by way of reduction of share capital or redemption of preference shares. Of course companies can buy-back its shares as per provisions of sections 68, 69 and 70.
Private companies are given exemption for section 67, if it satisfies the following three conditions. (a) body corporate (includes foreign company, LLP) have not invested money in share capital of the private company; (b) borrowings from banks or financial institution or any body corporate is less than twice the paid up share capital or Rs. 40 crore, whichever is lower; and (c) such private company has not made default in repayment of borrowings subsisting at the time of purchase of its own shares. Thus, private companies can buy its own shares in addition to reduction of share capital or redemption of preference shares, if it fulfills above three conditions. |
| 6 | Chapter V, clauses (a) to (e) of sub- section (2) of section 73. – Shall not apply to a private Company which accepts from its members monies not exceeding one hundred per cent. of aggregate of the paid up share capital and free reserves, and such company shall file the details of monies so accepted to the Registrar in such manner as may be specified. | From 01 April 2014, companies are prohibited from inviting, accepting or renewing deposits from public. Only eligible companies (public limited companies with net worth of Rs.100 crore or turnover of Rs.500 crore) can invite, accept or renew deposits from public, subject to several conditions.
However, companies (public and private) are permitted to accept deposits from its members subject to provision of the Rules and the following conditions: (a) company issues circular in form DPT-1 to its members; (b) files form DPT-1 with the ROC within 30 days before the date of its issue to members; (c) maintains liquid asset of 15% of amount of deposit maturing during the financial and the financial year next following and keeping it in a separate bank account with a scheduled bank to be called as deposit repayment reserve account; (d) providing deposit insurance; (e) certifying that the company has not defaulted in repayment of deposit or payment of interest thereon; and (f) securing deposit accepted from members by creating charge over assets of the company OR where no such charge is created the deposit shall be called “unsecured deposits” and stated so in every circular, form, advertisement etc. Now, provisions of section 73(2)(a) to (e) is no longer applicable to private companies. Thus, private companies are permitted to accept deposits from its members subject to provision of the Rules and they need not satisfy aforesaid five conditions (a) to (e) if – (a) amount of deposits from members does not exceed aggregate of the paid-up share capital and free reserves, and (b) details of monies accepted as deposit from members is filed with the ROC. Hopefully, MCA will soon 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. Also Rules 4, 5 and 13 requires suitable modifications. |
| 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. | Private companies are now given option to adopt provisions stated below or omit the same or provide their own regulations by suitably providing for the same in their articles of association.
Section 101: Notice of general meetings Section 102: explanatory statement to be annexed to notice of general meetings Section 103: Quorum for general meetings Section 104: Chairman of general meetings Section 105: Proxies Section 106: Restrictions on voting rights Section 107: Voting by show of hands Section 109: Demand for poll |
| 8 | Chapter VII, clause (g) of sub-section (3) of section 117.- Shall not apply. | Private companies are exempted from filing following Board Resolutions with the Registrar of Companies:
(1) to make calls on shareholders in respect of money unpaid on their shares; (2) to authorise buy-back of securities under section 68; (3) to issue securities, including debentures, whether in or outside India; (4) to borrow monies; (5) to invest the funds of the company; (6) to grant loans or give guarantee or provide security in respect of loans; (7) to approve financial statement and the Board’s report; (8) to diversify the business of the company; (9) to approve amalgamation, merger or reconstruction; (10) to take over a company or acquire a controlling or substantial stake in another company; (11) to make political contributions; (12) to appoint or remove key managerial personnel (KMP); and (13) to appoint internal auditors and secretarial auditor. |
| 9 | Chapter X, Clause (g) of sub-section (3) of section 141. –Shall apply with the modification that the words ” other than one person companies, dormant companies, small companies and private companies having paid-up share capital less than one hundred crore rupees” shall be inserted after the words “twenty companies”. | Following person can be appointed as auditor of a private company
A person who is in not in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of not more than twenty companies. For counting twenty companies – one person companies, dormant companies, small companies and private companies having paid-up share capital less than one hundred crore rupees shall be disregarded. |
| 10 | Chapter XI, section 160. – Shall not apply. | Section 160 of Companies Act, 2013 is similar to section 257 of the earlier Companies Act, 1956. It gives right to any person (other than a retiring director) to propose himself or any member can propose him as director of the company by sending requisite notice with deposit amount. While provision of section 257 was not applicable to private companies, section 160 is applicable to all companies, including private companies. Now, said section 160 is not applicable to private companies.
Thus, private companies are free to include suitable provision in their articles of association for eligibility of a person (other than retiring director) to be appointed as director of the company. |
| 11 | Chapter XI, section 162. – Shall not apply. | Section 162 of Companies Act, 2013 is similar to section 263 of the earlier Companies Act, 1956 requiring separate resolutions to be passed at a general meeting for appointment of each directors, where more than one director is to be appointed. While provision of section 263 was not applicable to private companies, section 162 is applicable to all companies, including private companies. Now said section 162 is not applicable to private companies.
Hence, private companies 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 of Companies Act, 2013 is similar to section 293 of the earlier Companies Act, 1956, putting restriction on powers of Board and enumerating several matters for which consent of members are required. While provision of section 293 was not applicable to private companies, section 180 is applicable to all companies, including private companies. Now said section 180 is not applicable to private companies.
Hence, Board of Directors of private companies can do following acts even without the consent of its members: (a) to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company, (b) to invest compensation received on merger or amalgamation; (c) to borrow money in excess of aggregate of paid-up share capital and free reserves; and (d) to remit, or give time for the repayment of, any debt due from a director. While law gives aforesaid option, private companies may continue to have restrictions of section 180 of the Act or may even provide stricter requirement than section 180. |
| 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(2) of Companies Act, 2013 is similar to section 300 of the earlier Companies Act, 1956, requiring director who is interested in any contract or arrangement placed before the Board at its meeting for approval, not to participate therein. While provision of section 300 was not applicable to private companies, section 184(2) is applicable to all companies, including private companies.
Now it is provided that in case of a private company, interested director may participate in the board meeting, after disclosing his interest. |
| 14 | Chapter XII, section 185. – Shall not apply to a private company – (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 of its paid up share capital or fifty crore rupees, whichever is lower; and (c) such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section. | Section 185 of Companies Act, 2013 is similar to sections 295 and 296 of the earlier Companies Act, 1956, prohibiting companies from advancing loan (including represented by book debt) to any of its directors or to any other person in which the director is interested. Prohibition even extends to giving of guarantee or providing any security in connection with any loan taken by him or such other person. While provisions of sections 295 and 296 were not applicable to private companies, section 185 is applicable to all companies, including private companies.
Now, private companies fulfilling following conditions can advance loan (including represented by book debt) to any of its directors or to any other person in which the director is interested. It can also give guarantee or provide any security in connection with any loan taken by him or such other person. The conditions are: (a) no other body corporate has invested any money in the share capital of private company; and (b) the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and (c) such a company has no default in repayment of such borrowings subsisting at the time of making transactions. |
| 15 | Chapter XII, second proviso to sub- section (1) of section 188. – Shall not apply. | Section 188 (1) enumerates several transactions with related parties, which requires approval of Board of Directors at its meeting. And where value of such transactions exceeds prescribed limit, it requires prior approval of members by way of a special resolution. Second proviso to section 188 (1) prohibits member who is a related party from voting at general meeting. This is based on principle that one shall not give approval to transaction in which he is interested. However, in case of private companies, often directors along with their relative are the only shareholders. Restriction under second proviso to section 188 (1) created dead lock as no one could vote at the general meeting. It seems, to overcome such a situation, in case of private companies, member who is a related party can cast vote at general meeting on any of the matters enumerated in section 188(1). |
| 16 | Chapter XIII, sub-sections (4) and (5) of section 196. – Shall not apply. | Section 196 deals with appointment of managing director, whole-time director and manager. It is similar to sections 197-A, 267, 269, 317, 384, 385 and 388 of the earlier Companies Act, 1956.
Section 196 (4) requires that appointment of a managing director, whole-time director or manager and the terms and conditions of such appointment and remuneration payable shall be approved by the Board of Directors at its meeting. And such appointment and remuneration payable which shall require approval by a resolution at the next general meeting of the company and subject to section 197 of the Act and Schedule V thereto. Such appointment and remuneration may require approval of the Central Government in case such appointment is at variance to the conditions specified in that Schedule. And under section 196(5) where an appointment of a managing director, whole-time director or manager is not approved by the company at a general meeting, any act done by him before such approval shall be deemed to be valid. Private companies are now exempted from the requirements of section 196(4) and (5). Thus, in case of private company, appointment of a managing director, whole-time director or manager and the terms and conditions of such appointment and remuneration payable need not be approved by the Board of Directors at its meeting. And such appointment and remuneration payable which shall not require approval of members by a resolution at the next general meeting of the company and shall not be subject to section 197 of the Act and Schedule V thereto. Consequently, even approval of Central Government would not be required. |
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