The Companies Act 2013, which replaced the Companies Act 1956, brought about significant changes for private limited companies. Under the new act, most of the exemptions available to private limited companies under the 1956 act were withdrawn. As a result, private limited companies have been subject to a number of additional compliance requirements. Various stakeholders have raised concerns regarding these requirements.
In response, the government – in exercise of its inherent powers under the 2013 act – introduced a draft notification before Parliament in July 2014 proposing the exemption of private limited companies from certain provisions. Having complied with due process under the 2013 act in respect of the proposed exemptions, the government has now issued a notification dated June 5 2015 in this respect. The exemption notification has been published in the Official Gazette and came into effect on June 5 2015.
This update summarises the exemptions available to private limited companies under the notification.
Under the 2013 act, related-party transactions require board approval and, in some instances, shareholder approval by way of a special resolution. For this purpose, the definition of 'related party' has been modified for private limited companies. The definition no longer includes:
- holding companies;
- subsidiary companies;
- associate companies; or
- subsidiaries of holding companies of a private limited company.
Therefore, transactions between a private company and an exempted entity will not be considered a related-party transaction and need not comply with Section 188 of the 2013 act.
In addition, Section 188 of the 2013 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.
The 2013 act provides for only two kinds of share capital (ie, equity shares and preference shares). While shares with differential rights for voting and dividends are permitted, permission is subject to certain conditions. These restrictions have now been removed for private limited companies. Private limited companies can issue any shares outlined in their charter documents (ie, memoranda or articles of association). This relaxation will help private limited companies looking to raise capital and will allow them to issue special classes of shares to investors.
Section 62 of the 2013 act provides as follows:
- An offer of rights to issue shares must be made by notice and despatched to existing shareholders at least three days before the opening of the offer.
- The offer must be kept open for minimum of 15 days and a maximum of 30 days.
This requirement has now been relaxed for private companies. The timelines specified above can be reduced if at least 90% of the shareholders consent in writing or electronically.
Under the 2013 act, the issue of shares to employees under an employee stock option plan requires a special resolution. This requirement has been waived for private limited companies, which now must pass an ordinary resolution only.
Under the 2013 act, companies can accept deposits from their members, subject to the fulfilment of certain conditions. These conditions are set out in Section 73 of the 2013 act and the Companies (Acceptance of Deposit) Rules 2014. These conditions will no longer apply to private limited companies which accept deposits from members that are less than 100% of their paid-up share capital and free reserves. However, exempted private companies must file the details of deposits from members with the Registrar of Companies.
Section 67 of the 2013 act restricts companies from buying their own shares or giving loans in order to purchase their shares. This restriction no longer applies to private limited companies that meet the following criteria:
- No corporate body has invested in the share capital of the company.
- Any loans from banks, financial institutions or corporate bodies is less than:
- twice the company's paid-up share capital; or
- Rs500 million, whichever is lower.
- There have been no defaults in the repayment of loans at the time of the proposed transaction.
Under Section 185 of the 2013 act, companies cannot:
- advance loans to directors or any persons in which the directors have an interest (ie, restricted persons); or
- provide any guarantee or security in connection with any loan obtained by directors or restricted persons.
Section 185 will no longer apply to private limited companies which meet certain criteria. These criteria are the same as those applied for exemptions from Section 67 (see above).
All companies must file copies of all resolutions passed by their boards of directors in respect of the circumstances set out in Section 179(3) of the 2013 act with the Registrar of Companies. Private limited companies are now exempt from complying with this requirement.
Section 141(3)(g) restricts companies from engaging a person (including a partner of a partnership firm) as an auditor if he or she already acts as an auditor for over 20 companies. The notification has modified this restriction. The appointment as an auditor for the following companies will not be considered when determining the eligibility of an auditor under Section 141(3)(g) of the 2013 act:
- one-person companies;
- dormant companies;
- small companies; and
- private limited companies with a paid-up share capital of less than Rs1 billion.
Section 180 of the 2013 act sets out certain activities which cannot be transacted by the board of directors without shareholder approval at a general meeting by way of a special resolution. Pursuant to the notification, these restrictions will no longer apply to private limited companies.
The 2013 act requires company directors who have an interest in a contract or arrangement to disclose their interest at the board meeting at which the contract or arrangement is discussed. Further, the disclosing director cannot participate in the relevant board meeting.
While the disclosure requirements continue to apply, interested directors of private limited companies can now participate in relevant board meetings after they disclose their interest.
Sections 196(4) and (5) of the 2013 act relate to the appointment of managing directors, full-time directors and managers (ie, senior management).
Section 196(4) states that all appointments of senior management by the board of directors must be subject to shareholder approval at a general meeting. Companies appointing senior management must also comply with, among other things, the terms and conditions set out in Schedule V of the 2013 act. If a company fails to comply with Schedule V, it must obtain central government approval. Companies appointing senior management must also file a return of the appointment with the Registrar of Companies in the prescribed format.
Section 195(5) clarifies that, in the event that shareholders do not approve the appointment of the senior management at a general meeting, any actions that the senior management took before rejection will remain valid.
Pursuant to the notification, private limited companies need not comply with Sections 196(4) and (5) of the 2013 act.
The following sections will continue apply to private limited companies, unless their articles of association provide otherwise:
- Section 101 (notice of meeting);
- Section 102 (statement to be annexed to notice);
- Section 103 (quorum for meetings);
- Section 104 (chair of meetings);
- Section 105 (proxies);
- Section 106 (restrictions on voting rights);
- Section 107 (voting by show of hands); and
- Section 109 (demand for polls).
The exemption notification provides private limited companies with the flexibility to prescribe their own regulations with respect to the situations covered under these sections of the 2013 act.
The notification has also exempted private limited companies from Section 160 (retiring directors and their appointment as directors) and Section 162 (directors' appointment to be voted individually).
For further information on this topic please contact Abhishek Saxena at Phoenix Legal by telephone (+91 11 4983 0000) or email (email@example.com). The Phoenix Legal website can be accessed at www.phoenixlegal.in.
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