Private company exemptions- has the wait paid off?

Prudence has at last endowed on the Parliament, to have finally cleared the exemption notifications, long lying on its desk awaiting its dissemination. After a long wait and completion of one complete financial year, Indian private companies have now been bestowed with exemptions on June 5, 2015[1] from such provision of law, which should have not been applicable to it in the very first place.

Recent amendments to the Companies Act, 2013 (‘Act’) have little to contribute to the ‘ease of doing business’ agenda of the Modi Government. In fact, in the patent fashion in which the MCA functions, the exemption notification (‘Notification’) clearly depicts the tyranny of the administration; wherein most of the exemptions are conditional with little or no rationale behind it.

In this article, we attempt to analyse the major exemptions and the post notification scenario:

Filing of MGT-14 for resolutions of the Board:

After a complete year of filing MGT-14 with the MCA, the private companies are now exempt from such filing with respect to board resolutions. However, the filing of other resolutions as mentioned in Section 117 (special resolutions) of the Act, is still required.

Further, the exemption is with regard to filing of the resolutions with the Registrar of Companies, the requirement of addressing the matter at a duly convened meeting of the Board in terms of Section 179 remains intact. Hence resolution of the Board shall still be required.

Relief in limits of statutory audits:

Section 141(3)(g) permitted the audit of 20 companies per partner of an audit firm. The notification excludes the following companies from the afore mentioned limits:

• one person companies;
• dormant companies;
• small companies;
• private companies having a paid up share capital of less than 100 crores[2].

However, as per ICAI guidelines on company audit[3], the number of audit assignments per partner of the firm or per chartered accountant in practice is 30 (thirty) assignments, whether in respect of private companies or others. However, the number of public company audits is restricted to 10 in case of such companies have paid up capital exceeding 25 lacs. Therefore, the total number of audits continues to be restricted to 30 at the most.

Related party transactions:

a. The definition of related parties under section 2(76) of the Act, has been revised to not include the following w.r.t. to a private company;

• holding company;
• subsidiary company;
• associate company;
• fellow subsidiaries.

Transactions with other related parties shall still fall under the purview of Section 188 and compliance will have to be ensured. Hence, the relief is only mechanical and not thoughtful. If the intent was to excuse RPTs, private companies may have been completely exempted as was proposed in the draft notification[4].

b. For the purpose of ensuring a prior approval of the shareholders in general meeting as per Section 188(1), the rule of minority voting only has been revamped to allow related parties to vote on such resolutions. Hence, the majority of minority rule shall not apply in case of private companies.

Disclosure of interest by directors:

Private company directors shall not abstain from participating and voting on such matters which in which they are interested. Disclosure of interest alone shall suffice. The restriction itself should not have been applicable to private companies, in every transaction of the company.

No restrictions on powers of the Board:

Section 180 of the Act has been finally aligned with its corresponding section of the erstwhile Act, 1956, i.e., Section 293. The Board of private companies shall now be free to address and decide upon matters mentioned under Section 180 and the requirement for shareholders’ approval has been dispensed with.

Following are the matters prescribed under Section 180:

a. selling, leasing or otherwise disposing whole or substantially the whole of undertaking of the company;

b. investing the compensation amount received by it as a result of any merger or amalgamation;

c. borrowing money in excess of its paid up capital and free reserves;

d. remitting or giving time for repayment of any debt due from a director.

Loan to directors etc.

The Section that has imposed the biggest functional and operational hindrance shall continue to haunt private companies. The exemption brought about in the notification is conditional and to add to the disgrace, the conditions seem anything but sensible.

The lending shall be subject to the following:

a. there is no body corporate shareholder in the lending/guaranteeing company;

b. the lending company’s aggregate borrowings from other bodies corporate or banks or financial institutions is limited

i. twice net worth of company; or

ii. Rs 50 crores

whichever is lower;

c. there is no pending default in repayment of such borrowings by the lending company.

The very first condition is disheartening, as there is rarely a private company with zero corporate shareholding. Inter-company shareholding is a common corporate structure. While the MCA is issuing an exemption, the essence is distorting the purpose.

Acceptance of deposit from members:

One more conditional relief; acceptance of deposits and loans from members shall be exempt from upto 100% of the net worth of the Company. Although the same was completely exempt under the erstwhile Act read with Companies (Acceptance of Deposit) Rules, 1975[5], now the same is only provisionally exempt.

Lending against the shares of the Company:

Section 67(1) clearly prohibits buy back of shares and lending against its own shares by a company. However, this particular clause is not dehors the provisions of section 66 and 68. As such prohibition under the Section is itself subject to the provisions of Section 66. Further, Section 68 starts with a non obstinate clause (which overrides anything stated in Section 67). Hence, its clearly understood that the exemption is only for lending against its own shares, had the intent been broader, the other connected sections would also have been accordingly amended.

Besides, the exemption from lending against its own shares is subject to the following:

a.  there is no body corporate shareholder in the lending/guaranteeing company;

b. the lending company’s aggregate borrowings from other bodies corporate or banks or financial institutions is limited

i. twice net worth of company; or

ii. Rs 50 crores

whichever is lower;

c. there is no pending default in repayment of such borrowings by the lending company.

Right of persons other than retiring directors to stand for directorship:

Yet another example of uncalled humility of the MCA, the section has been made inapplicable for private companies. It would have taken a layman to understand that the question of an outsider proposing for directorship does not arise in the case of a private company. Perhaps the feeling of granting exemptions elates the administrators so much so that initially everything is blindly made applicable to every entity and then as rightly said by company law expert Mr. Vinod Kothari, the MCA appears in its ‘main hoon na’ avatar.

Appointment of directors vide a single resolution (Section 162):

To ascertain as to what could have been the driving force behind this exemption, surely demands a MCA vision. Amongst all points of exemptions, this seems the most uncalled for. Private companies will be able to appoint more than one director with a single resolution, without a prior unanimous shareholders’ resolution (as was the case under section 263 of the erstwhile Act). The implication of this exemption on the ease of doing business is still not understood.

Kinds of share capital & voting rights:

Section 43 and 47 of the Act, dealing with kinds of share capital and voting rights respectively, shall not apply to a private , if its charter documents (Memorandum & Articles of Association) so provide.

Relaxation in provisions of rights issue (Section 62):

The notification provides that if 90% of the members of a private company provide their consent in writing or in electronic mode, then the company can:

a. disregard the limit on time period of offer may be;

b. dispatch notice of a less than 3 days prior to the opening of the issue.

General Meeting provisions:

The provisions relating to notice, explanatory statement, quorum, proxy, chairman and voting shall not apply to a private company unless the contrary is specifically provided for in the Act or in the articles of the Company.

Approval & remuneration of managerial personnel:

Provisions with respect to approval of terms and conditions of appointment including remuneration of managerial personnel [section 196 (4 & 5)] is not applicable to private companies. Even validity of actions done by them where appointment is not in accordance with the provisions of the said section shall not be questionable.

Conclusion:

The MCA seems to be on a spree of issuing notifications and clarifications and securing the highest on the quantitative score card of amendments. The Notification was till date the most awaited promulgation pertaining to the Act, however, the same has been nothing but grossly disappointing. The Notification is a failed attempt to treat the ailing the companies of India.

[1]  https://taxguru.in/company-law/exemptions-private-companies-462-ca-2013.html

[2] Under the draft notification, all private companies where exempted.

[3] http://www.icaiknowledgegateway.org/littledms/folder1/chapter-6-the-company-audit.pdf

[4]  https://taxguru.in/company-law/mca-issues-draft-notification-comments-sections-companies-act-2013.html

[5]  https://taxguru.in/company-law/companies-acceptance-deposits-rules-1975.html

(Author Can be Reached at vijayaagarwala@gmail.com)

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