The Government of India 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:
a. 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 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 limited companies.
b. 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.
c. Rights issue
Section 62 (1) (a) (i) 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) of the Act, 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 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 company can make further issues of shares under ESOP scheme only by passing of ordinary resolution.
d. Restrictions on purchase by company of its shares
Under Section 67 (1) of the Act, a company was not allowed to buy its own shares unless it results in consequent reduction of share capital of the company. The notification now exempts private companies from the application of Section 67, 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 any body 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.
e. 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.
The notification has now exempted private companies 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.
f. 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 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 empowered to lay down its own procedure in respect of conduct of its general meetings
under the Companies Act, 1956. The same has now been restored under the 2013 Act.
g. 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:
a. calls on shareholders in respect of money unpaid on their shares;
b. buy-back of securities;
c. issuance of securities, including debentures, whether in or outside India;
d. borrowing of monies;
e. investment of funds of the company;
f. granting of loans or giving guarantee or providing security in respect of loans;
g. approval of financial statement and the Board’s report;
h. diversification of business of the company;
i. amalgamation, merger or reconstruction;
j. takeover of a company or acquiring a controlling or substantial stake in another company;
k. 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
h. Number of company audits
For the purpose of limit on number of companies of which audits can be taken at a time by the audit or under
Section 141 (3)(g) of the Act, which is 20, all one person companies, dormant companies, small companies, and
private companies having a paid up share capital of less than ` 100 crores will be excluded.
i. 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. j. 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:
i. Sale, lease or disposal of the whole or substantially whole of the undertaking of the company;
ii. Investment of the amount of compensation received by the company as a result of merger or amalgamation
in trust securities;
iii. Borrowing money exceeding the aggregate of the company’s paid-up share capital and free reserves; and
iv. 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 Act.
k. 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.
l. 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 a director(s) or by any persons/ entities in
which the director(s) have an interest. There are 3 cumulative conditions for availing the exemption:
(a) There is no body corporate shareholder in the lending/guaranteeing company;
(b) 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 ` 50 crores whichever is lower;
(c) No default in repayment of such borrowings is pending by the lending company.
m. 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 whole-time 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 exempt from the above requirements.
Many of the changes under this notification are to restore the exemptions that were earlier available to private
companies under the Companies Act, 1956. The 2013 Act constrained the operational flexibility hitherto available to
private companies bringing them at par with public companies on several compliances. The notification is a welcome
step towards easing the operations of private companies.