The Government has notified several changes and relaxations in the applicability of the provisions of the Companies Act, 2013 (‘the Act’) to private companies vide notification dated June 5, 2015. The key changes are highlighted below:
- Related Party Transactions
Definition of related party under Section 2(76)(viii) for the purpose of Section 188 has been relaxed to exclude a private company in respect of compliance of related party contracts with its holding, subsidiary or an associate company under Section 188 of the Companies Act, 2013.
In addition, Section 188 of the Companies Act imposes some restrictions on shareholders considered to be related parties. Related parties cannot vote at general shareholders' meetings regarding a resolution to approve any contract or arrangement between the company and the related party.
Pursuant to the notification, this restriction will not apply to private companies.
- Kinds of Share Capital and Voting Rights
Private companies have now been exempted from application of Section 43 and Section 47 of the Act, which deals with kinds of share capital and voting rights, respectively, if memorandum or articles of the Company so provide. This means that private companies can now issue shares with differential rights with full flexibility to structuring their securities even without voting rights.
- Rights issue
Section 62(1)(a)(i) of the Companies Act provides that time period for rights offer shall not be less than 15 days and not more 30 days. Private company can now reduce the time period of rights offer than that prescribed under Section 62(1)(a)(i), if the 90 (ninety) percent of the members of a private company have given their consent in writing or in electronic mode. Furthermore, the requirement of sending the notice 3 days prior to opening of the issue, by way of specified means, under rights issue is now exempted for private companies.
Section 62(1)(b) of the Companies Act provides that where a company intends to increase its share capital by the issue of further shares can do so by offering shares to employees under a scheme of employees’ stock option (ESOP). Before the amendment, such further issue of shares by a company was to be done by passing a special resolution. Now, private companies can make further issues of shares under ESOP scheme only by passing of ordinary resolution.
- Restrictions on purchase by company of its shares
Under Section67(1) of the Companies Act, a company was not allowed to buy its own shares unless it results in consequent reduction of share capital of the company. With the notification now exempting private companies from the application of Section 67, private companies can now buy its own shares without consequent reduction in share capital provided:
no other body corporate has invested money in share capital of such private company;
the borrowings of such private company from banks or financial institutions or anybody corporate is not equal to or more than twice its paid up share capital or fifty crore rupees, whichever is lower; and
such private company is not in default in repayment of such borrowings subsisting at the time of making transactions under Section 67 of the Act.
However, there is ambiguity as to whether a private company can buy its own shares as there is no similar exemption provided to private companies under Section 66 (Reduction of Capital) and Section 68 (Buyback of Shares). In our view, the only objective achieved by this amendment is provision of financial assistance by a private company to purchase its own shares.
- Acceptance of deposits from member
Section 73(2) allows acceptance of deposits by a company from its members with approval by way of ordinary resolution and subject to fulfilment of certain conditions prescribed under clauses (a) to (e) like 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, etc.
Private companies have now been exempted from the conditions in clauses (a) to (e) of Section 73(2) in relation to deposits taken from members 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 such private company and the relevant filings with the Registrar of Companies has been made.
- Management and Administration
Private companies have now been provided with an option to exclude the applicability of Sections 101 to 107 and Section 109 by providing for exclusions in its Articles of Association. Section 101 to 107 and Section 109 deals with procedure of conducting of general meetings by the companies, which are length of service of notice of meeting, explanatory statement, quorum, chairperson of the meetings, proxies, restriction on voting rights, voting by show of hands and demand for poll.
A private company was allowed to lay down its own procedure in respect of conduct of its general meetings under the Companies Act, 1956. Now the same position has been restored under the Companies Act, 2013.
- Filing of board resolutions
All companies are required to file copies of board resolution under Section 117(3)(g) of the Act passed in relation to matters prescribed under section 179(3) of the Act. These matters were:
- calls on shareholders in respect of money unpaid on their shares;
- buy-back of securities;
- issuance of securities, including debentures, whether in or outside India;
- borrowing of monies;
- investment of funds of the company;
- granting of loans or giving guarantee or providing security in respect of loans;
- approval of financial statement and the Board’s report;
- diversification of business of the company;
- amalgamation, merger or reconstruction;
- Takeover of a company or acquiring a controlling or substantial stake in another company;
- Additional matters as may be prescribed.
Now, Section 117(3)(g) of the Act will not apply to private companies, hence, a private company will not be required to file copies of board resolution in relation to all of the matters mentioned above with the Registrar of Companies.
- Number of company audits
For the purpose of limit on number of companies of which audits can be taken at a time by the auditor under Section 141(3)(g) of the Companies Act, which is 20, all one person companies, dormant companies, small companies, and private companies having a paid up share capital of less than INR 100 crores will be excluded.
- Appointment of directors to be voted individually
Provisions of Section 162 which provided for the manner of appointing of two or more were to be voted individually will now not apply to private companies.
- Restrictions on powers of Board
Section 180(1) of the Act which provided that board may exercise its power in relation to the following matters, only with the consent of members by way of special resolution:
- 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
Now, there is no need for a private company to pass special/ ordinary resolution for exercising powers under Section 180 of the Companies Act.
- Interested Directors
Section 184(2) provided that directors of a company will refrain from participating in a board meeting for matters in which they are interested. Interested director in a private company can now participate in board meetings after disclosure of his interest.
- Loans by private companies
A partial exemption from Section 185 has now been given to private companies giving a loan, providing a guarantee or offering a security in connection with a loan taken by director(s) or by any persons/ entities in which the director(s) have an interest.
There are 3 cumulative conditions for availing the exemption:
- There is no body corporate shareholder in the lending/ guaranteeing company;
- The lending company’s aggregate borrowings from other bodies corporate or banks or financial institutions is limited to two times the paid-up share capital of the company or INR 50 crores whichever is lower;
- No default in repayment of such borrowings is pending by the lending company.
- Appointment of managerial persons
Section 196(4) and (5) of the Act prescribes the procedure and approval requirements for appointment of managing director, manager or wholetime director and requires companies to comply with the provisions of Section 197 and Schedule V with respect to remuneration payable to such personnel. The provision requires board approval followed by approval of members in the next general meeting for appointment of such personnel and filing of return of appointment of such personnel within 60 days from the date of such appointment.
Private companies are now exempted from the above requirements.
[Source: Notification no. G.S.R 464(E) dated June 5, 2015]
Similarly, the MCA has issued following exemption/ relaxation notifications:
- For Government companies, the MCA has issued Notification no G.S.R 463(E) dated June 5, 2015
- For Nidhi companies, the MCA has issued Notification no G.S.R 465(E) dated June 5, 2015
- For Not-for-Profit companies (also known as Section 8 companies), the MCA has issued Notification no. G.S.R 466(E) dated June 5, 2015.