Relaxation / Exemptions to Private Companies under Companies Act, 2013

Section 188(1) specifies certain types of related party transactions requires approval of Board of Directors at Board meeting, disclosure of specified matters in agenda of board meeting, interested director shall not remain present during discussion of related party transactions, and where it’s value is beyond prescribed limits, such transactions also requires prior approval of shareholders by way of a special resolution with prescribed details to be specified in explanatory statement annexed to notice of general meeting.

The exemption is given to private companies from applicability of said requirements so far as related party transactions are with holding company, subsidiary company, fellow subsidiary company or an associate company. It may be noted that section 188 is applicable to private companies for transactions with related parties specified under section 2 (76) – (other than those stated above).

Section 43 states companies limited by shares can have two kinds of share capital viz. equity (including equity with differential voting rights) and preference share capital. Exemption is provided to private companies from section 43, if either its memorandum or articles of association so provides. The effect could be that private companies may have only one kind of share capital say preference share capital (though term ‘preference’ indicates that there shall be one other kind of share capital). Or private companies can issue equity shares with differential voting rights without compliance of conditions related thereto specified under the Companies (Share Capital and Debentures) Rules, 2014.

Section 47 provides voting rights equity shareholders and preference shareholders. Exemption is provided to private companies from section 47, if either its memorandum or articles of association so provides. The effect could be that private companies can determine voting rights of its equity shareholders and preference shareholders in any manner it desires by incorporating suitable provision in its memorandum or articles of association. It seems the exemption is given to boost investments as it gives freedom to private companies in case of joint venture or private equity funding to structure the capital and voting rights. However, this exemption from section 47 is subject to section 106 of the Companies Act, 2013. Section 106 provides that company can prohibit its members from exercising his voting rights only on the ground (which shall be stated in its articles of association) that no member shall exercise any voting right in respect of the shares on which any calls or other sums presently payable by him have not been paid or in regard to which the company has a right of lien and has exercised that right. Section 106(2) threatened the intended freedom to private companies to raise capital. However, private companies are given option to alter or omit provisions of Section 106 by making suitable provision in its articles of association.

Section 67 restricts companies to buy its own shares, except by way of reduction of share capital or redemption of preference shares. Of course companies can buy-back its shares as per provisions of sections 68, 69 and 70. Private companies are given exemption for section 67, if it satisfies the following three conditions.

(a) body corporate (includes foreign company, LLP) have not invested money in share capital of the private company;

(b) borrowings from banks or financial institution or any body corporate is less than twice the paid up share capital or Rs. 40 crore, whichever is lower; and

(c) such private company has not made default in repayment of borrowings subsisting at the time of purchase of its own shares.

(2) of section 73. Substituted by Notification dated 13 June 2017 refer table 2

From 01 April 2014, companies are prohibited from inviting, accepting or renewing deposits from public. Only eligible companies (public limited companies with net worth of Rs.100 crore or turnover of Rs.500 crore) can invite, accept or renew deposits from public, subject to several conditions.

However, companies (public and private) are permitted to accept deposits from its members subject to provision of the Rules and the following conditions:

(a) company issues circular in form DPT-1 to its members;

(b) files form DPT-1 with the ROC within 30 days before the date of its issue to members;

(c) maintains liquid asset of 15% of amount of deposit maturing during the financial and the financial year next following and keeping it in a separate bank account with a scheduled bank to be called as deposit repayment reserve account;

(d) providing deposit insurance;

(e) certifying that the company has not defaulted in repayment of deposit or payment of interest thereon; and

(f) securing deposit accepted from members by creating charge over assets of the company OR where no such charge is created the deposit shall be called “unsecured deposits” and stated so in every circular, form, advertisement etc.

Now, provisions of section 73(2)(a) to (e) is no longer applicable to private companies.

Thus, private companies are permitted to accept deposits from its members subject to provision of the Rules and they need not satisfy aforesaid five conditions (a) to (e) if –

(a) amount of deposits from members does not exceed aggregate of the paid-up share capital and free reserves, and

(b) details of monies accepted as deposit from members is filed with the ROC.

Hopefully, MCA will soon modify Rule 3(3) of the Companies (Acceptance of Deposits) Rules, 2014, which states that maximum amount of deposit that a company may accept from its members shall not exceed 25% of its paid-up share capital and free reserves. Also Rules 4, 5 and 13 requires suitable modifications.

Private companies are now given option to adopt provisions stated below or omit the same or provide their own regulations by suitably providing for the same in their articles of association.

Section 101: Notice of general meetings

Section 102: explanatory statement to be annexed to notice of general meetings

Section 103: Quorum for general meetings

Section 104: Chairman of general meetings

Section 105: Proxies Section 106: Restrictions on voting rights

Section 107: Voting by show of hands

Section 109: Demand for poll

Private companies are exempted from filing following Board Resolutions with the Registrar of Companies:

(1) to make calls on shareholders in respect of money unpaid on their shares;

(2) to authorise buy-back of securities under section 68;

(3) to issue securities, including debentures, whether in or outside India;

(4) to borrow monies;

(5) to invest the funds of the company;

(6) to grant loans or give guarantee or provide security in respect of loans;

(7) to approve financial statement and the Board’s report;

(8) to diversify the business of the company;

(9) to approve amalgamation, merger or reconstruction;

(10) to take over a company or acquire a controlling or substantial stake in another company;

(11) to make political contributions;

(12) to appoint or remove key managerial personnel (KMP); and

(13) to appoint internal auditors and secretarial auditor.

A person who is in not in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of not more than twenty companies. For counting twenty companies – one person companies, dormant companies, small companies and private companies having paid-up share capital less than one hundred crore rupees shall be disregarded.

Earlier, Interested director cannot attend and vote on the resolution passed related to Disclosure of Interest pursuant to section 184(2) of Companies Act, 2013.

Now Interested director can participate in such meeting after disclosure of his interest.

No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him.

Now this provision is not applicable to Private Companies –

(a) body corporate (includes foreign company, LLP) have not invested money in share capital of the private company;

(b) borrowings from banks or financial institution or any body corporate is less than twice the paid up share capital or Rs. 50 crore, whichever is lower; and

(c) such private company has not made default in repayment of borrowings subsisting at the time of purchase of its own shares.

In relation to appointment of MD, WTD & Manager, following were mandatory:

Special Resolution in General Meeting Compliance of Schedule V Filing of Form MR-1 (Return of appointment of MD/WTD/Manager) Terms and Conditions of Appointment need to be mentioned in the resolution.

Now, Above requirement for the appointment of MD/WTD/Manager is not applicable for private companies.

The proviso would apply as under:- Provided that the financial statement, with respect to One Person Company, Small Company, dormant company and private company (if such a private company is a start-up), may not include the cash flow statement;

A Start up private company is not required to include the cash flow statement in the financial statement

Substitution of the Clause 6 in the 5t^h June, 2015 exemption Notification to a private company which provided for exemption from accepting from its members.

Now exempts (i) Private Companies which accepts money not exceeding 100% of the paid up capital and free reserves and securities premium. (ii) Startup private company for 5 years from its incorporation. (iii) Also to a private company which is not an associate or a subsidiary of a company, having borrowings less than twice of its paid up share capital or Rs 50 crore whichever is less and default in repayment of borrowings is not subsisting at the time of acceptance of deposits.

Provided that the company referred to in Clause (i), (ii) or (iii) shall file the details of monies accepted to the Registrar in such manner as may be specified.

Private companies which are Small Companies need to disclose aggregate amount of remuneration drawn by directors. They need not give details of remuneration of all the directors and key managerial personnel individually.

Except above every company shall prepare a return (hereinafter referred to as the annual return) in the prescribed form containing the particulars as they stood on the close of the financial year.

Also provided that in relation to One Person Company, small company and a private company (if such private company is a start-up), the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.