Private Company means:
Sec 2(68) defined Private Company as a Company having a minimum paid up share capital, as may be prescribed and which by its articles:
a) restricts the rights to transfer its shares if any;
b) limit the number of member to 200, not including:-
i) persons who are in the employment of the company; and
(ii) 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; and
where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of membership, be treated as a single member:
c) prohibits any invitation to the public to subscribe for any securities of the company;
By virtue of Companies Amendment Act, 2015 the paid-up share capital requirement of atleast Rs. 100,000 is done away with.
Minimum number of director- A private company
In order to form a Private Company, a minimum two directors are required as per Section 149 of the Companies Act, 2013.
Further even in case of Private Company there shall be at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year. [Sec 149(3) of the Companies Act, 2013].
Subscribers to the Memorandum of Association
As per the Act, two persons is needed to form a private company. Any of an individual or body corporate is eligible to become a subscriber in a company.
A partnership firm cannot be the subscribers to the Memorandum of Association. A minor who is not competent cannot be a signatory to the Memorandum of Association. A Joint Hindu Family cannot be subscriber to memorandum. However, a Karta or manager of Joint Hindu Family may sign on its behalf.
It is also pertinent to note that a Private Company cannot be incorporated with two members one being preference shareholder, as they have restricted membership rights and cannot constitute the quorum for a general meeting.
Limitation on number of members
A Private Company as per its definition given under the Companies Act, 2013, need to restrict its number of members to 200 through its articles of association.
First proviso of Sec 2(68) of the Companies Act, 2013, 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.
With reference to former employee for the befit of the exemptions being available to the Company, such employees must have been members while they were in employment and continues as members after ceasing to be in employment of the Company. Thus, first they have to be employee then member of the Company.
Whether directors can be counted as members of the Company
If they are holding any shares of the Company, they shall be considered as member of the Company.
However, if they are employed in any other capacity like Company Secretary, then it may be treated as employee of the Company and then will not be counted towards the maximum number of members.
Restriction on inviting public to subscribe for securities
As mentioned in the definition of Private Company in Companies Act 2013, Section 2 –
“(iii) prohibits any invitation to the public to subscribe for any securities of the company”
In term of this Section of the Act, the private company is prohibited to make any call to the public to subscribe for its securities. It also prohibits the company any invitation or acceptance of deposits from anyone other than its members, directors or their relatives.
A private company can only collect its capital by private approach.
Name – It is required by the law that the word private limited or abbreviation such as ‘Pvt. Ltd. must be added at the end of the name of a private limited company.
Government Companies are not required to use the private limited at the end of their name. (Exemption Notification dated 5th June 2015 by Ministry of Corporate Affairs).
Privileges and exemptions enjoyed by the Private Companies
The Private Companies have been granted various privileges and exemptions from the applicability of certain provisions of the Companies Act, 2013 as compared to Public Company. The reason behind the same is that there is a restriction in transfer of its shares and there is no involvement of public funds. Hence, they are not needed to follow stringent procedures and less accountable in the eye of the law as compared to Public Companies.
The following privileges and exemptions are available to private company:
1. Easy to start – The act requires only two persons to form a private company as compared to seven or more persons needed in case of public company. [Section 3]
2. Lesser formalities while issuing securities- Private Company shares are not issued through initial public offering (IPO). Hence, they do not have to drive their energy to comply with stringent provisions as required while issuing IPO by Public Company. They can issue securities through private placement right, issue and some other means.
3. Minimum number of Directors – Since private company has restricted number of members (maximum of 200) the minimum number of directors needed is also kept at two against minimum three in the case of public company. [Section 149]
4. Quorum of the general meeting – Unless article provides a higher quorum for the general meeting of the shareholders the act in case of private company limited it to two members personally present to constitute a valid quorum. [Section 103]
5. Voting through Electronic means- The private company are not required to comply with the procedures of providing the facility of remote voting to its members. [Section 108]
6. Retirement by Rotation- Section 152 requires that at least 2/3rd of the total number of directors of a public company are liable for retirement by rotation. It means all the directors of the private company can be non-rotational directors [Section 152]
7. Special disqualifications for appointment as Directors- A private company may by its articles provide for any special disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2) [Section 164(3)]
8. Vacation of Directors – A private Company which is not a subsidiary to public company may by its articles provide that the office of the director shall be vacated on any ground in addition to those specified in sub -section 1 of section 167. For example, if provided in the articles of a private company the office of director may become vacant if requested in writing by the majority of directors to resign. There is no bar by the Companies Act, 2013 for inclusion of such provision in the articles of the private company. [Section 167]
9. Restrictions on number of directorships – A person can be a director in maximum 10 public companies whereas he can be a director in maximum 20 private companies provided none of those companies is a public company or holding or subsidiary of public company. [Section 165]
10. Independent Director- A private company is not required to have an independent director and women director in its Board of Directors. [ Section 149]
11. Appointment of Internal Auditor –Only the private company having the threshold limit of turnover of two hundred crore rupees or more during the preceding financial year or having outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year is required to appoint internal auditor. Exemptions are given to small private companies. [Section 138]
12. Audit and NRC Committee- A Private Company is not required to constitute Audit or NRC Committee of the Board [ Section 177 and 178 ]
13. Key Managerial Personnel – Private company is not obligated to appoint Key managerial personnel as they have a close business affair and appointing such personnel will be a financial drain for a private company. [Section 203]
14. Appointment of Secretarial Audit – Since the compliance module of private company is limited in scope the appointment of Secretarial Auditor for conducting secretarial audit is not needed by private company. [Section 204] Additional Privileges and Exemptions vide MCA Notification No. F.No. 2/11/2014-CL-V dated 05.06.2015 as amended vide its notification dated 13.06.2017
15. Lending against shares – The prohibition to buy back its own shares shall not apply to private company:
(a) In whose share capital no other body corporate has invested any money
(b) If the borrowings of such a company from banks or financial institutions or any body corporate is less than twice its paid up share capital or 50 crore rupees whichever is lower; and
(c) Such a company is not default in repayment of such borrowings subsisting at the time of making transitions under this section.
16. Auditors’ eligibility – Private Company with paid up capital less than Rs. 100 crores can appoint any eligible auditor as their company’s auditor irrespective of the 20-audit limit imposed.
17. Related party transaction – Dealings of private company with exempted entities under section 2(76) of the Companies Act, 2013 such as holding company of private company, associate or subsidiary company and investment company will not be treated as related party transactions with respect to section 188.
18. Relaxation from filling of Board Resolutions- The resolutions passed by the Board of Directors of a private company under 179(3) of the Companies Act, 2013 is not required to file with Registrar of Companies under the form MGT 14.
19. General meetings – Private Company are given liberty to provide their own procedures with regard to conducting the general meetings if the articles of the company provide otherwise.
20. Kinds of share capital – Companies limited by shares can have two kinds of share capital viz. equity (including equity with differential voting rights) and preference share capital. Exemptions is given to the private company and they can have any kind of share capital if either their memorandum or articles so provide.
21. Voting Rights – Private Company 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.
22. Further issue of shares – In case of right issue under section 62 period of notice can be shortened and private company may close its offer of rights issue before minimum period of 15 days. In other words, it needs not keep its right issue open for minimum period of 15 days. These benefits are available only if 90% of the member of the Company agrees.
23. Right of Persons Other than Retiring Directors to Stand for Directorship- Sec 160 is not applicable to private companies which provides the right of persons other than the retiring directors to stand for directorship at any general meeting of the Company if he or some other member intending to propose him as a director complies with the requisites given under Sec 160 of the Companies Act, 2013.
24. ESOP – For issue of shares to its employees under Employees’ stock Option Scheme a private company may pass an ordinary resolution as against special resolution.
25. Acceptance of deposits- Following private companies can borrow funds from its members without complying with the conditions as stated in clauses (a) to (e) of sub-section (2) of section 73 of the Companies Act 2013 provided they inform ROC in a prescribed manner.
(A) which accepts from its members monies not exceeding one hundred per cent. of aggregate of the paid-up share capital, free reserves and securities premium account; or
(B) which is a start-up, for five years from the date of its incorporation; or
(C) which fulfils all of the following conditions, namely:-
(a) which is not an associate or a subsidiary company of any other company;
(b) if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid-up share capital or fifty crore rupees, whichever is lower; and
(c) such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section
26. Separate resolution for the appointment of the directors – There should be a separate resolution for the appointment of each director. Such restrictions under Section 162 have been lifted for the private company which can pass a single resolution for appointment of two or more directors.
27. Interested party- There is no restrictions for the related party to vote in favour of a resolution in general meeting to approve any contract or agreement between a private company and related party.
28. Restrictions on the power of the Board – The Board of Directors of the private company can exercise the powers given under Section 180 of the Companies Act, 2013 without going through the procedure of obtaining approval of the shareholders as applicable in case of public company.
29. Appointment of Managerial Personnel – The private company are not required to seek approval of shareholder in general meeting and of Central Government for the appointment of MD/WTD/Manager. Further the provisions of Schedule V will also not apply.
30. Disclosure in financial statement – A stary up private company is not required to include cash flow statement in its financial statement.
31. Disclosure in Annual Return – A small private company may disclose aggregate remuneration paid to all its directors instead of directors’ remuneration individually.
32. Signing of Annual Return- In case of a start-up private company the annual return shall be signed by the director of the Company in case there is no company secretary.
33. Participation of interested director – An interested director of a private company can participate in the discussion of the agenda in which he is interested only if they disclose their interest.
34. Internal Financial Control – The disclosure under section 143(3)(i) of the Companies Act 2013 is not applicable in case of one person or small private company or which has turnover less than rupees fifty crores as per latest audited financial statement or which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than rupees twenty-five crore.”.
35. Meeting of the Board of Directors- A private company which is start up may hold only one meeting of the Board in each half of the calendar year provided the gap between the two meetings is not less than ninety days.
It may be noted that the exemptions granted to private company vide notification dated 05.06.2015 as well as further notification dated 13.06.2017 shall be applicable to private company which has not committed a default in filling financial statement or annual return with Registrar of Companies.