DEFINITION OF PRIVATE COMPANY

Clause (68) of section 2 of the Companies Act, 2013 (Section 2(68))

Private company means a company having a minimum paid-up share capital of one lakh rupees or such higher 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 share in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

Provided further that –

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

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

ANALYSIS OF DEFINITION OF PRIVATE COMPANY

Initially there was no minimum paid-up capital requirement for the companies but Companies (Amendment) Act, 2000 (w.e.f 13-12-2000) introduced this minimum paid-up capital requirement for the companies and since then there was requirement of minimum paid-up capital of rupees one lakh for private companies but Companies (Amendment) Act, 2015 removed this minimum paid-up capital requirement for ease of doing business and after Companies (Amendment) Act, 2015, threre is no requirement for minimum paid-up capital for companies. But till now there is no minimum paid-up capital requiremnt for companies but power has been given to the Government (i.e executive) where it can prescribe minimum-paid up capital requirement through rule.

 Sub-clause (i) of section 2(68)

This sub-clause restricts the right to transfer its shares now you might think that why this provision is required now think in a way that your competitor wants to buy shares for having control of your company and mainly private companies are member-managed companies (where directors and members both are same persons) so this sub-clause gives you power to deny such kind of transfer because private companies restricts transfer of shares generally through pre-emption right (i.e. where seller of shares has to ask for other members of companies to buy his shares) or refusal to accept transfer of shares by directors.

Since private company can restrict it means transfer of shares in private company is possible subject to some conditions which may be imposed by private company and there is restriction not prohibition.

Sub-clause (ii) of section 2(68)

As you must be aware that Companies Act, 2013 brought in new kind of company (like proprietorship) i.e. One Person Company (OPC) where one peson (natural person) can get his company incorporated and as the name suggest that it can have only and only one membe, that is why this sub-clause (ii) starts with ‘except in case of one person company’.

Private company has to have minimum number of members of 2 (refer section 3 of the Companies Act, 2013) and sub-clause (ii) puts limitation on maximum number of members and in case of private company maximum number of members can go upto 200 (Under the Companies Act, 2013 this maximum number of members limit was 50 but Companies Act, 2013 increased it to 200).

As per first proviso to sub-clause (ii) joint holders shall be treated as single member (it seems logical because some people hold shares jointly and that is why this proviso gives relief to private company having shares in the name of joint holders).

As per second proviso to sub-clause (ii) present employees cum members and past employees (who have left company but continued to be members of the company) cum members shall not be counted in number of members. This second  proviso gives relief to private company when private company allot shares under stock option plan to retain the employees for the longer period  and to attract talented employees via allotting shares under stock option plans.

Sub-clause (iii) of section 2(68)

Now this sub-clause maintains the character of private company as private because this sub-clause prohibits invitation for subscription of any securities (shares, debentures etc.) to the public. Private company can go capital raising through private placement but number of members must not exceed 200. There is no cap on maximum number of debenture holders  etc.

Even while going for crowd funding private companies shall bear into mind that number of members shall not exceed 200.

Disclaimer – Author has exercised utmost care while writing this article, but still this article may contain some error or mistake and no part of this article/writing should be construed or considered as any advice or consultancy whether professional or otherwise.

Author may be reached at [email protected]

Author Bio

Qualification: CA in Practice
Company: KARACT FILINGS
Location: New Delhi, Delhi, India
Member Since: 26 Jan 2018 | Total Posts: 22
Chartered Accountant having more than 6.5 years of very rich experience in the field of GST, Custom, Income-tax, Company law, LLP law, Corporate law, pre-GST regime indirect tax laws (VAT, Service tax,, Excise law etc.), FCRA, FEMA, Accounting, Financial reporting, Ind-AS, IFRS, stock market etc. View Full Profile

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