Exemptions to Private Companies under Notification dated 5th June 2015
The Ministry of Corporate Affairs (“MCA”) vide notification dated on June 5, 2015 directed that certain provisions of the Companies Act, 2013 (“2013 Act”) shall not apply to private limited companies or shall apply with such exceptions or modifications as directed in the notification (the “Notification”).
These exemptions and relaxations are applicable only to a private company which is not a subsidiary of public company. The existing compliance requirements and restrictions will continue to apply to a public company and a private company which is a subsidiary of public company.
A detailed analysis of effect of exceptions or modifications in respective section is provided herewith.
- In Chapter I, sub-clause (viii) of clause (76) of section 2: Shall not apply with Respect to Section 188.
Effect of Exemption: The Notification provides that, in relation to a private company, the entities specified in Section 2(76)(viii) of the 2013 Act (i.e., the Group Companies) would not be considered related parties for the purposes of Section 188. As a result of this relaxation, private companies shall not be required to obtain the approval of the board or the shareholders, for the purpose of entering into a contract/ arrangement with a Group Company.
2.Chapter IV, Section 43 and Section 47: Shall not apply where memorandum or articles of association of the private company so provides.
Effect of Exemption: This relaxation would provide major relief, especially for private equity investors since they typically need priority on dividend, liquidation and voting rights on the investee Company..
Section 43 of the Act provides that a share capital of a company limited by shares shall be of two kinds, that is equity and preference. By present notification Private Companies are free to design equity shares and preference shares with differential rights. Further, if the Memorandum and Articles of Association of the company so provide, provisions relating to voting rights as contained in section 47 of the Act will not be applicable to a private limited company.
This exemption will also help in structuring returns to foreign investors. Now the returns to Foreign Investors can be planned by way of equity instruments having differential voting rights.
- 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 percent. 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.
Effect of Exemption:
Section 62 of the Act deals with issuance of further shares and provides that the same shall be issued to the holders of the equity shares in the same proportion in which they are holding shares in the capital of the company. Sub-clause (a) (i) of subsection (1) of the said section provides that the offer shall be made by a notice specifying the number of shares offered and requiring the shareholder to subscribe for such shares within a time not being less than 15 days and not exceeding 30 days from the date of the offer. A proviso is being added by the aforesaid notification so as to provide that in case 90% of the members of a private company have given their consent in writing or in electronic mode, period less than that specified in the above sub-clause may be given for issuance of such shares. Similarly, the period of 3 days specified in sub-section (2) of section 62 of the Act for dispatch of notice for making the aforesaid offer can be reduced, if the approval is taken in a similar manner from the members of a private limited company.
- 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.
Effect of Modification: Section 62(1)(b) of the Act deals with the issuance of shares to employees under a scheme of employees’ stock options. These can now be issued by passing an ordinary resolution instead of a special resolution by a private limited company.
- Chapter IV, section 67: Shall not apply to private companies –
- in whose share capital no other body corporate has invested any money;
- if the borrowings of such a company from banks or financial institutions or anybody corporate is less than twice its paid up share capital or fifty crore rupees, whichever is lower; and.
- such a company is not in default in repayment of such borrowings subsisting at the time of making transactions under this section.
Effect of Exemption: Under Section 67 (1) of the Act, no company limited by shares was permitted to buy its own shares either unless consequent reduction of capital effected under the provisions of the Act. With the new Notification exempting private companies from the application of Section 67 (1), Private Companies are allowed to buy its own shares without consequent reduction in capital subject to satisfaction of the above said conditions.
- 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 percent 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.
Effect of Exemption: The Notification has exempted private companies from the requirement provided under , clauses (a) to (e) of sub-section (2) of section 73, which deals with certain conditions, including the issuance of circular including a statement showing financial position of the company, creation of a deposit repayment reserve account, obtaining deposit insurance, obtaining a certificate from the directors that the company has not defaulted in repayment of deposits accepted, provided that the amount of deposit accepted by the private company does not exceed 100% of aggregate of paid-up capital and free reserves of the private company and the relevant filings has been done with the Registrar of Companies in this respect.
- 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.
Effect of Exemption: If Articles of Association of the Company provide otherwise, then in case of Private Companies, sections 101 to 107 and Section 109, which deals with the requirements of convening and conducting of general meetings by all companies, such as service of notice of general meeting, explanatory statement, quorum, chairperson of the meetings, appointment of proxies, restriction on voting rights, voting by show of hands and demand for poll, shall not be applicable.
- Chapter VII, clause (g) of sub-section (3) of section I17: Shall not Apply:
Effect of Exemption: Pursuant to the notification section 179(3), became not applicable to a Private Company thereby reducing the Compliances and now the Company is not required file the following Resolutions with Registrar
- To make calls on shareholders in respect of money unpaid on their shares
- To authorise buy-back of securities under Section 68
- To Issue securities, including debentures, whether in or outside India
- To Borrow monies
- To Invest the funds of the company
- To Grant loans or giving guarantee or providing security in respect of loans
- To approve financial statement and the Board’s report
- To deiversify the business of the company
- To approve amalgamation, merger or reconstruction
- To take over a company or acquiring a controlling or substantial stake in another company
- Any other matter which is prescribed under Rule 8 of Companies (Meetings of Board and its Powers) Rules, 2014
- 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”.
Effect of Exemption: By the said notification the Limit of 20 Companies in which an auditor can undertake the audit work excluded one-person companies, dormant companies, small companies and private companies having paid up share capital of less than Rs.100 Crore.
- Chapter XI, section 160: Shall not apply
Effect of Exemption: Section 160 of the Act prescribes the rights of persons other than retiring directors to stand for directorship and by present notification this section is not applicable to a private company.
- Chapter XI, section 162: Shall Not Apply
Effect of Exemption: Section 162 of the Companies Act 2013 prohibits companies from passing a single resolution in general meeting for appointment of 2 or more directors unless such a motion has first been agreed unanimously by all the shareholders. This section made not applicable to Private Company.
- Chapter XII, section 180: Shall Not Apply.
Effect of Exemption: Section 180(1) of the Companies Act, 2013 provides that the board of Directors of the Company shall exercise its power in respect of the following matters only with the approval of members by way of special resolution:
- Sale, lease or otherwise dispose the whole or substantially whole of the undertaking of the company;
- To invest otherwise in securities the amount of compensation received by the company as a result of merger or amalgamation in trust securities;
- To borrow money exceeding the aggregate of the company’s paid-up share capital and free reserves; and
- To Remit or granting time for the repayment of, any debt due from a director.
By the present notification the section 180 made not applicable to a Private Company.
- 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.
Effect of Notification: pursuant to this notification in Private Companies interested director is permitted to participate in the board meeting after disclosing his/ her interest.
A situation where if there are only two Directors and if one or both is interested then the meeting cannot hold because of the applicability of this provision and such peculiar situations will be avoided.
- Chapter XII, section 185: Shall not Apply to a Private Limited Company –
- In whose share capital no other body corporate has invested money
- if the bonowings of suoh a company from banks or financial institlrtions or any body corporate is less than twice of its paid up share capital or fifty crore rupees whicheve t is lower, and
- such a company has no defaulted in repayment of such borrowings subsisting at the time of making transactions under this section:
Effect of Exemption: The Section 185, which prohibit companies from giving loans to directors and to persons in whom directors are interested or give any guarantee or provide any security in connection with any loan taken by him or such other person are not applicable to a Private company if the company satisfies the above 3 conditions mentioned in clause a, b, and c.
- Chapter XII, second provision to sub-section (1) of section 188: Shall not Apply.
Effect of Notification: This exemption permit members of the company interested in the contract/ arrangement to vote on the resolution for authorizing the related party transaction.
- Chapter XIII, sub-sections (4) and (5) of section 196: Shall not Apply.
Effect of Notification: Pursuant to this notification Private companies are exempted in:
- Seeking approval of members and of Central Government where the appointment of Managerial Personnel is not in accordance with the provisions of Schedule V.
- Notice convening the board or general meeting for considering Managerial Personnel’s appointment shall include terms and conditions of such appointment, remuneration payable and other matters including interest of a director or directors in such appointment.
- Filing return of appointment of Managerial Personnel in Form MR-1 with the Registrar of Companies.
- Provisions governing validity of acts of Managerial Personnel not being approved by the members.