Exemptions to Private Companies – A candle in a Dark Room

N. Vimal Kumar Jain

♥ Background: This article provides a synopsis of all the exceptions, modifications and adaptations made in Companies Act, 2013 for the Private Companies. An attempt is made to highlight the venues that can be freely transacted by private companies.

♥ Related Party Transactions:

Section 2(76) speaks about the definition of “related party”, whereas Section 188 requires that all the specified transactions with related parties that are not in ordinary course of business and which are not at arm’s length price would require approval from the Board of the Company.

After the modifications from the MCA, section 2(76) (viii) shall not apply with respect to Section 188. Hence the following clauses are outside the purview of related party transactions under section 188:

“i) Any company which is a holding, subsidiary or an associates company of such company, or

ii) Any company which is subsidiary of a holding company to which it is also a subsidiary company”.

Further, the second proviso to section 188 (1) states that “no member of the company shall vote on such resolution, to approve any contract or arrangement which may be entered into by the Company, if such member is a related party”. This second proviso to the section 188 (1) will not apply to private companies.

THE CRUX

From the above modifications, it is been observed that though relaxations has been given to the holding, subsidiary or associates as per section 2(76) (viii) for any Related Party Transaction (RPT), the other clauses of 2(76) still stand to be attracted for having a common directors, KMP, etc. in the Company, which may be an usual compliances of section 188 regardless of this modifications..

♥ Further Issue of shares

Section 62 (1) deals with Further Issue of Shares. Section 62 (1) (a) provides for the time limit in which the offer should made that is to say “not less than fifteen days and not exceeding thirty days from the date of offer”.

Besides offer, it also states that if offer is not accepted within the specified time limit it would be deemed to have been declined. To provide ease of doing such transitions for private companies, MCA has inserted a proviso to the Section 62(1) (a) (i) which read as follows:

“Provided that notwithstanding anything contained in this sub clause and sub-section (2) of this section, in case ninety per cent of the members of a private company have given their consent in writing or in electronic mode, the periods lesser than those specified in the said sub-clause or sub-section shall apply”.

After the above modifications, a private company can reduce a time limit specified for rights issue lesser than the period specified in section 62 (1) (a) and section 62 (2) by getting consent of 90 % of the members either in writing or in electronic mode.

Further, Section 62 (1) (b) which deals with the issue of further shares to the employees under a scheme of employees’ stock option subject to the requirement of passing a “special resolution” by the company.

The MCA has now modified the section 62 (1) (b) which provides that the private companies can issue such class of share by passing an “ordinary resolution”

♥ Appointment as Auditor

Section 141 (3) (g) states that a person who is 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 re-appointment holding appointment as auditor of more than 20 companies shall be disqualified from being appointed as an auditor of the company in which he is going to be appointed.

The MCA has now modified the said sub clause by inserting the following modifications which is read as follows:

“Other than one person companies, dormant companies, small companies and private companies having paid-up share capital less than one hundred Crores rupees”.

From the above, the following companies shall be excluded for calculating the limit of 20 companies for the disqualifications of auditors in the private companies:

1. One Person Companies,
2. Dormant Companies,
3. Small Companies, and
4. Private Companies having paid-up

Share Capital is less than 100 Crores rupees.

♥ Administration of General Meeting

The articles of the private company can have specific provisions regarding following sections:

Section 101 – Notice of the Company

Section 102 – Statement to be annexed to notice

Section 103 – Quorum for Meetings

Section 104 – Chairman of Meetings

Section 105 – Proxies

Section 106 – Restrictions on Voting Rights

Section 107 – Voting by Show of Hands

Section 108 – Voting through electronic means

Section 109 – Demand for Poll

The above sections shall apply to a Private Companies unless otherwise specified in respective sections or the articles of the private company provide otherwise. Hence the specific clause of Articles in such case will prevail over these sections or in other terms it will over ride these sections.

From the above, it is clear that the Private Companies can now have a substantial relaxation in the administration of the general meetings.

♥ Disclosure of Interest by Director

Section 184 speaks about the disclosure of interest by the Director. Section 184 (2) states that an interested director to a contract or arrangement or proposed contract or arrangement in which he is concerned or interested, should not participate in the Board Meeting where such contract are entered in.

The MCA has now made an exception to the above sub section for private companies by allowing “interested director may participate in such meeting after giving disclosure of interest”.

THE CRUX

From the above exceptions, it is quite clear that an interested director of private Companies may participate in such meeting, but he may not be counted as member of the meeting according to the section 174 (3) for the purpose of Quorum which states that “ Where at any time the number of interested directors exceeds or is equal to 2/3^rd of the total strength of the Board, the numbers of directors who are not interested directors and present at the meeting, being not less than 2, shall be the Quorum during such time”.

The Crux clears that, even though relaxation has been given, the interpretation of the law if cannot be mistaken, will be read in such a way that which might give arise to the difficulties for corporates to pass on resolution where there are interested directors. Thus, while the law is getting settled, MCA should come up with clarification on this behalf to prevent the hardships which may be faced in near future.

THE CRUX

From the above exceptions, it is quite clear that an interested director of private Companies may participate in such meeting, but he may not be counted as member of the meeting according to the section 174 (3) for the purpose of Quorum which states that “ Where at any time the number of interested directors exceeds or is equal to 2/3^rd of the total strength of the Board, the numbers of directors who are not interested directors and present at the meeting, being not less than 2, shall be the Quorum during such time”.

Loans to Directors

According to Section 185 (1) no company shall provide or advance any loan to the director or to any other person in whom the director is interested.

The MCA with an exceptions, has made the Private Companies outside the purview of this Section, provided that –

a) No other body corporate has invested in its share capital;

b) Which have the borrowing from banks or financial institutions or any body corporate is less than the twice of their paid up share capital or 50 Crores Rupees, whichever is lower and;

c) Such a company has not defaulted in repayment of such borrowings subsisting at the time of making transactions under this section.

Now a private company fulfilling the above conditions can provide or advance loans to any of its directors or any other person in whom the director is interested.

♥ Resolutions and Agreements

Section 117 relates to resolutions or any agreements to be filed with the ROC. Section 117 (3) (g) states that resolutions passed in pursuance of sub-section (3) of section 179, Powers of the Board should follow the requirement of the section 117. In other words any resolution passed under section 179 (3) need to be filed with the ROC with the time specified in that section.

With the MCA notification for exceptions to private companies, the resolution passed by the private companies covered in section 179 (3) will no longer be required to file with ROC are as follows:

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

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

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

d) to borrow monies;

e) to invest the funds of the company;

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

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

h) to diversify the business of the company;

i) to approve amalgamation, merger or reconstruction;

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

k) any other matter which may be prescribed*.

* Matters that are prescribed

For any other matter which may be prescribed. These matters are prescribed in the rules after amendment:

Companies (Meetings of Board and its Powers) Rules, 2014

In addition to the powers specified under sub-section (3) of section 179 of the Act, the following powers shall also be exercised by the Board of Directors only by means of resolutions passed at meetings of the Board.-

(a) to make political contributions;

(b) to appoint or remove key managerial personnel (KMP);

(c) to appoint internal auditors and secretarial auditor.

♥ Restriction on Powers of Board

Section 180 states that the Board may exercise certain powers only with the consent of company by a special resolution.

The MCA now made an exception to these powers for the private companies. In other words, private companies can without the consent of the company by a special resolution exercise the following powers:

a) To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings,

b) To invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation

c) to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business

d) To remit, or give time for the repayment of, any debt due from director.

♥ Other Exceptions for Private Companies

Section 43 deals with “Kinds of Share Capital” and

Section 47 deals with “Voting Rights”.

The above two sections shall not apply to the private companies, were the memorandum or articles of associations of the company so provides.

So from the above, it is clear that the private companies can now have flexibility in their share capital and can even have share with differential voting rights.

Section 67 speaks about “Restrictions on Purchase By Company or giving of Loans by it for Purchase of its Shares”. The sections provides that “No company limited by shares or by guarantee and having a share capital shall have power to buy its own shares unless the consequent reduction of share capital is effected under the provisions of this Act”

The MCA with an exceptions, has made the Private Companies outside the purview of this Section, provided that –

a) No other body corporate has invested in its share capital;

b) Which have the borrowings from the banks or financial institutions or anybody corporate is less than the twice of their paid up share capital or 50 Crores Rupees, whichever is lower and;

c) Such a company has not defaulted in repayment of such borrowings subsisting at the time of making transactions under this section.

If the private company fulfils the above requirements then section 67 shall not apply to the private companies. In other words now a private company can buy back its own shares.

Section 73 deals with the prohibition on acceptance of deposits from public. Whereas, Section 73 (2) states that a company may accept the deposits after fulfilling the following conditions:

a) Issuance of circular to its members,

b) Filing a copy of circular with ROC with in thirty days before the date of issue of circular,

c) Deposits not less than a 15% of the amount in the separate bank account,

d) Provide deposit insurance,

e) Certify that the company has not made any default in repayment of its deposits,

f) Providing security if any for the due repayment for the amount of deposits.

With the MCA modifications for the exceptions to the private companies, the above listed conditions shall not apply to a private:-

“Companies which accept from its members monies not exceeding 100% of aggregate of the paid up share capital and free reserves, and such company shall file the details of monies so accepted to the Registrar in such manner as may be specified”.

Section 160 speaks about right of persons other than retiring director to stand for directorship. With the MCA notification the said section shall not apply in relation to the private companies.

Section 162 says that appointment of directors to be voted individually. With the MCA notification the said provision shall not apply to the private companies. Thus, any private companies can now move a motion at its general meeting for appointment of two more persons as director of the company in a single resolution.

a) Issuance of circular to its members,

b) Filing a copy of circular with ROC with in thirty days before the date of issue of circular,

c) Deposits not less than a 15% of the amount in the separate bank account,

d) Provide deposit insurance,

e) Certify that the company has not made any default in repayment of its deposits,

f) Providing security if any for the due repayment for the amount of deposits.

♥ The Way Forward…

The above relaxations provided to the Private Companies are not the complete cure but can prove to be great relief. The regulators have been liberal in the areas of deposits, eligibility of auditors, ESOPs, etc., but were not able to meet the expectations of the corporates in the areas of RPT, Loan to Directors, etc., to make them totally exempt from the bucket. Private companies may be required to amend clauses of the MoA/AoA in order to avail certain exemptions given by the regulators.

Nevertheless, the Corporates should welcome these steps initiated by the MCA in providing the these relaxations, which can now make a Private Companies to actually feel a comfort of satisfaction in the Chambers of the Companies Act, 2013.

On a positive note, let’s hope for some more initiation like this from the MCA in the near future.

(Author is a CA FInal Student from Nungambakkam, Chennai)