Corporate Law

# Exemptions to Private Companies

## 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 a 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 a public company.

### Detailed Analysis of Exemptions and Effects

1. Related Party Transactions (Section 2(76)(viii))

   Shall not apply with respect to Section 188.

   Effect: 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, private companies shall not be required to obtain the approval of the board or shareholders for entering into a contract/arrangement with a Group Company.

2. Kinds of Share Capital and Voting Rights (Section 43 & Section 47)

   Shall not apply where the memorandum or articles of association of the private company so provides.

   Effect: This relaxation provides major relief, especially for private equity investors since they typically need priority on dividend, liquidation, and voting rights in the investee Company. Private Companies are now free to design equity and preference shares with differential rights. Provisions relating to voting rights in Section 47 of the Act will not apply if AoA/MoA so provides, helping structure returns for foreign investors.

3. Further Issue of Share Capital (Section 62(1)(a)(i) & Section 62(2))

   Ninety percent of members can consent to a shorter notice period.

   Effect: The notice period for subscribing to a rights issue (minimum 15 days, maximum 30 days) and the 3-day dispatch period can be reduced if consent is given in writing or electronic mode by at least 90% of the members of the private company.

4. Employee Stock Option Scheme (Section 62(1)(b))

   Ordinary resolution substituted for special resolution.

   Effect: Shares to employees under a scheme of ESOPs can now be issued by passing an ordinary resolution instead of a special resolution.

5. Restrictions on Purchase of Own Shares (Section 67)

   Shall not apply to private companies satisfying specific conditions:

   - No other body corporate has invested money in the share capital.
   - Borrowings from banks or financial institutions or body corporates is less than twice its paid-up share capital or fifty crore rupees, whichever is lower.
   - No default in repayment of borrowings exists.

   Effect: Private companies meeting these conditions are allowed to buy their own shares without a consequent capital reduction.

6. Monies Accepted from Members (Section 73(2)(a) to (e))

   Shall not apply if deposits do not exceed 100% of aggregate of paid-up capital and free reserves.

   Effect: Exempts private companies from requirements like issuing a circular showing financial position, creating a deposit repayment reserve, obtaining deposit insurance, and obtaining a director certificate of non-default, provided the 100% cap is maintained and details are filed with the ROC.

7. Conduct of General Meetings (Sections 101 to 107 & Section 109)

   Shall apply unless Articles of Association provide otherwise.

   Effect: Private companies can specify their own rules in their Articles regarding notice service, explanatory statements, quorum, proxies, voting by show of hands, and demand for poll.

8. Filing of Resolutions (Section 117(3)(g))

   Shall not apply to board resolutions passed under Section 179(3).

   Effect: Private companies are no longer required to file board resolutions with the ROC for making calls on shares, authorizing buy-backs, issuing securities/debentures, borrowing, investing, granting loans/guarantees, approving financial statements, or diversifying the business.

9. Limit on Audits (Section 141(3)(g))

   Modifies the 20-company audit limit per auditor.

   Effect: One-person companies, dormant companies, small companies, and private companies with a paid-up share capital of less than ₹100 crore are excluded from the 20-company audit ceiling.

10. Appointment of Directors (Section 160 & Section 162)

    Section 160 (rights of non-retiring directors to stand for directorship) and Section 162 (prohibiting a single resolution for multiple directors) shall not apply.

11. Board Powers and Borrowings (Section 180)

    Shall not apply.

    Effect: Private companies do not need a special resolution for the sale/lease of the undertaking, investing compensation from M&As, or borrowing money exceeding paid-up capital and free reserves.

12. Interested Director Participation (Section 184(2))

    Effect: Interested directors in a private company are permitted to participate in the board meeting after disclosing their interest, avoiding deadlock situations where there are few directors.

13. Loans to Directors (Section 185)

    Shall not apply to private companies meeting specific conditions:

    - No other body corporate has invested money in its share capital.
    - Borrowings from banks or financial institutions is less than twice paid-up share capital or fifty crore rupees, whichever is lower.
    - No default in repayment of borrowings exists.
14. Interested Members Voting on Related Party Transactions (Section 188(1))

    Second proviso shall not apply.

    Effect: Members who are interested in the transaction/arrangement are permitted to vote on the resolution authorizing it.

15. Managerial Remuneration and Appointments (Section 196(4) & (5))

    Shall not apply.

    Effect: Exempts private companies from seeking member/government approval if the appointment is not in accordance with Schedule V, inclusion of specific terms in notices, and filing Form MR-1 with the ROC.