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In India, there are around 1250 Laws applicable in different terms in different manner. Some laws use word Prohibition and some use Restriction. But, these both terms are being used in different sense at different locations. To interpret the meaning of these words to be applied at specific provision in Law, it is necessary to understand the difference between these two. We can understand this concept with the help of definition of “Private Company” as enshrined in Section 2(68) of Companies Act, 2013.

As per clause 68 of section 2 of Companies Act, 2013, “Private Company” means a company having a minimum paid up share capital as may be prescribed, and which by its articles –

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its members to two hundred;

Provided that where two or more persons hold one or more shares in a private company jointly, they shall, for the purposes of this clause, be treated as a singe member.

Provided further that –

(A) persons who are in the employment of the company, and

(B) Persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be  members after the employment ceased,

shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the company.

Let us analyse the above-mentioned points one by one.

(i) As per section 44 of Companies Act, 2013, Shares by their nature are freely transferable, but here this provision gives a right to the Articles of Association of the Private company that it may Restricts the transfer of of its shares. It means that transfer of shares of a private company are also freely transferable unless it articles restricts the right to do so. If we come to conclusion of this point, we can say that this provision does not prohibit the transfer of shares from one person to another, but only gives a right to the articles of the private company that they may themselves decide either to restrict or not the transferability of shares.

(ii) It is very well known that maximum number of members in a private company shall be restricted to 200 only. But, will this number get increase in actual terms? The answer is in affirmative. How? It has been explained here in provisos to this section.

  • First proviso explains that if two or more persons jointly holds any number of shares in a private company, those two or more persons will be deemed as one person only while counting the maximum limit of 200 members, irrespective of the number of shares held by them together or separately.
  • Second proviso explains that following persons (members) shall straight forwardly not be included in the number of 200 members irrespective of the number of shares held by them –

(A) The current employee of the company, who is also the member of the company, which means he is working as an employee and also a member of the company (As per Section 9 of Companies Act, 2013, a person may be a member, employee, debtor, creditor, etc. at the same time in the same company).

(B) The former employee of the company, who when was the employee of the company held shares of the company while in that employment and left the company as employee but continued to be the member of the company. It means that if any employee first left the company and later on acquire the shares of the same company, than he will be considered in the limit of 200 members.

The above mentioned provision in point (B) can be understood with the help of following example.

Example: ABC Private Limited is a private company in which Mr. X is working as an Accountant, means an employee of the company.

Scenario 1: Mr. X while in the employment, acquire some shares of the company on 01st June 2020 and left the job of Accountant from the company on 10th June 2020 but continued to be the shareholder of the company. He will not be counted in the maximum limit of 200 members either before or after the acquisition of membership in the company.

Scenario 2: Mr. X was working in the company as an Accountant and left the job on 10th June 2020. He, then acquired some shares in the same company on 15th June 2020. As per above mentioned provisions, in this case, Mr. X acquire the membership after he ceased to be the employee of the company, so he will be considered as a member in the maximum limit of 200 members.

(iii) Section 23 of Companies Act, 2013 says that any Private Company may issue securities either by way of Bonus or Right issue or through Private Placement (Section 42 of Companies Act, 2013) only. But, this section Prohibits the private company from issue of securities to the public either by way of initial public offer or further public offer. So it can be concluded here that Private company cannot make an issue of shares to the public at large. It can only issue shares to a specified number of persons and that too in total shall not exceed 200 in number.

Similarly, Prohibitions and Restrictions are using differently in numerous provisions of Companies Act, 2013, say, Section 53, Section 67, Section 70, Section 73, Section 180, Section 182, Section 249, Section 464, etc.

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  1. Sowjanya says:

    Hi i have a question
    What if the employee or ex employee wants to transfer shares further to someone who is not employee then will it be considered in 200 members limit

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April 2024