Exemptions for Private Limited Companies under Companies Act, 2013

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The introduction of the Companies Act of 2013 made a significant impact in the corporate world, with the addition of the new provisions to ease doing business in India. But, this new Act had withdrawn several exemptions which were being enjoyed by the private limited companies in the Companies Act of 1956, leaving private limited companies to comply with several requirements. The article below gives a summary of the exemptions which are being granted to Private Limited Companies under the modified act.
Based on the concerns and the feedback raised by the related individuals and experts, the Act has been further amended several times relaxing a few provisions therein, thus aiming for a business-friendly India.

A notification made on 05th June 2015 notified the exemptions for private companies from certain provisions of the Companies Act 2013. The notification was issued by exercising the powers which were 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 the Companies (Incorporation) Rules 2014 numerous times and is now with its fifth amendment which came into force on January 1, 2017.
The article below discusses the exemptions available for a private company based on the notification made on June 2015.

Highlights

In Companies Act of 2013, minimum paid up capital requirement for a Private Limited Company was Rs.1 lakh. This has been amended, and as on date, there is no minimum paid up capital required for a Private Limited Company

These exemptions made available through the notification are related to the following provisions:
Related party transactions
Share capital
Public deposits
Meeting Requirements
Agreements and resolutions
The auditor eligibility
Directors
Power of the board
Senior Management Appointment

Related Party Transactions

According to the Companies Act of 2013, companies are required to get the board’s approval or a special resolution with the shareholders consent with regards to the related party transactions.

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

Therefore, any contract or arrangement between a private company and the exempted entities like a holding company, subsidiary companies, associate companies and the subsidiaries of a holding company to which such private company is also a subsidiary will not require approval from Board of Directors or a shareholders approval in some cases.

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

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

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

Furthermore, the compliance requirements on disclosure of the related party transactions will continue to apply to a private company.
In addition, the provisions existed under Section 188 of the Act with regard to restrictions on the related party shareholders has been lifted, and such related parties are allowed to vote at a general meeting of the shareholders for a resolution to approve any contract or arrangements between the company and a related party.

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

The permission for related parties voting is a great relief to the private companies having disinterested members was not at many times possible in private companies where there are few members who are usually related to each other.

Share Capital

As per Section 43 of the Companies Act, 2013, the Companies are allowed only two kinds of shares, equity shares and preference share capital.
Equity shares with or without the differential rights to dividend, voting was allowed, subject to conditions.
As per Section 47 of the Act, the equity shareholders will be entitled to vote on all resolutions, while preference shareholders are qualified to vote only on the resolutions which will affect their rights or are in relation to winding up or the reduction of capital of the Company as prescribed under the 2013 Act.

Exemption to the Act provides that both the above-mentioned clauses aren’t applicable to a private company if the articles of association or the memorandum of association of such private company provides so.

Therefore, the private company can have any kind of share capital in accordance with their articles. In short, 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 can aid the private limited companies looking to raise capital and issue special classes of shares to the investors. According to the experts, relaxation will avoid difficulties in structuring shares and can earn priority on the dividend, liquidation and the entitlement to vote on an as-if-converted basis. It is expected that the exemption will also help in structuring the returns and liquidation preference to foreign investors.

Public Deposits

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

The exemption notification specified that the provisions under Section 73 of the Act will not be applicable to the 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 needed to file details of such deposits from the members with the Registrar of Companies in such manner as may be specified.

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

Meeting requirements

The provisions under the Act with regard to the procedures for convening general meetings for a private limited weren’t separately disclosed in the Companies Act of 2013. The provisions were available under 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 reinstated the powers of the private companies to decide their own procedure regarding the conduct of general meetings by incorporating the provisions in their articles of association.

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

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

Resolutions and Agreements

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

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

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

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

Auditor Eligibility

As per the Section 141 (3) (g) of the Companies Act of 2013, auditor who is in full time employment elsewhere or in the capacity as the auditor of more than 20 companies at the date of appointment or reappointment will not eligible to be appointed as auditor of the company.
The restriction is applicable to the auditing firms, partner or a partnership firm. The Exemption Notification has modified this restriction. The appointment of an individual as an auditor of one person company, a dormant company, small companies; and private limited companies which are having a paid up share capital of less than Rs. 100 Crore can 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, private limited companies are allowed to retain the same statutory auditor. Furthermore, the exemption is a relaxation to auditing firms to expand their professional expertise by enhancing their business reach with more and more private companies.

Directors

The exemptions that are 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
As per Section 160 of the Act, the individual who wishes to stand for directorship is required to deposit Rs.1 lakh and to serve 14 day notice with regard to such intention for directorship. The same isn’t applicable for retiring directors. The Act is amended by lifting this requirement and an individual for directorships in private companies can stand in for directorship without serving the notice of 14 days and a deposit of ₹1 lakh. Nevertheless, the rights for the retiring directors continue to be as earlier.

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

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

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

B. Interested Directors’ Participation in meeting
As per the Section 184(2) of the Act, director or directors of a company were needed to reveal their nature of interest with the company with whom a contract and arrangement is entered if they directly or indirectly are in association with that company.

Such directors are also restricted from participating in meetings of the Board discussing such contract or arrangement. The clause in the Companies Act made it tough for many private companies to comply with, particularly in companies having two directors and either one or both of them not being interested.

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

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

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

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

Loans to Directors
As per the Section 185 of Companies Act of 2013, company isn’t allowed to grant loans to any of its directors or to any other person in which the director is interested.

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

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

a) No other body corporate shareholder in lending company;
b) if borrowings of such a company from the banks or the 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 the repayment of such borrowings subsisting at the time of making transactions.

Power of Board

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

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

Senior Management Appointment

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

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

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

Pursuant to the exception, both the above mentioned sections and the provisions therein aren’t applicable to the private companies. Thus, in case of the private companies the appointment or the remuneration of the Managing Director, Whole time Director or the Manager doesn’t require an approval at the Board Meeting/General Meeting and consequently the approval of the Central Government is also not needed, even if the conditions for the appointment are not as per the requirements of Schedule-V of the Act.

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

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

Conclusion

In India, a lot of start-ups are formed as private limited companies. In the budget 2017-18, several relaxations were announced for start-ups. It is clear that the government has enormous expectations of the startup community and is willing to make changes to accommodate them.

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A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.

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