EXEMPTION TO PRIVATE COMPANIES

On 5^th June 2015, Ministry of Corporate Affairs posted here a draft notification to be published in Official Gazette announcing some exemption to Private Companies.

As there is no effective date is announced in the Notification, this notification shall come into effect on the date of its publication in the Official Gazette.

[UPDATE 20th June 2015: MCA uploaded copy of Official Gazette dated 5th June 2015, in which this Notification is published. Meaning that; These exemption came into force from that date]

The Notification is issued in exercise of power conferred by Clauses (a) and (b) of Sub – section (1) of 462 read with sub –section (2) of said section of the Companies Act, 2013. A copy of this notification has been laid in draft before both Houses of Parliament as required by sub-section (2) of section 462 of the Companies Act, 2013.

Paragraph 2 of the Notification cast a condition on the Private Companies:

“The Private Companies, while complying with such exceptions, modifications adaptations, as specified in column (3) of the aforesaid Table [Given in Paragraph 1 of the Notification], shall ensure that the interests of their shareholders are protected.”

This is a subjective condition and may complicate litigations. This may also open for Secretarial Standards and Circulars.

Now, we discuss exemption granted under Paragraph 1 of the Notification.

Related Party [Section 2(76)(viii)]:

The sub – clause (viii) of clause (76) of Section 2 shall not apply in case of private companies for the purpose of Section 188.

This Clause includes in the definition of related party, any company which is—

(A) a holding, subsidiary or an associate company of such company; or

(B) a subsidiary of a holding company to which it is also a subsidiary;

Share Capital and Voting Rights [Section 43 and 47]:

Where Memorandum [and/] or Articles of Association of a Private Companies provides that these section shall not apply these sections shall not apply [or may apply with some modification as provided in these documents].

Many readers earlier want to confirm whether their Articles required to be altered to aligned with the Companies Act, 2013; this blog always replied negatively. Hope, these readers may understand now.

EFFECT:

A private company may have any kind of shares and voting rights as per their own Articles.

Further Issue of Share Capital [Section 62]:

A proviso is being inserted to sub – clause (i) of clause (a) of sub – section (1) of Section 62 [Section 62(1)(a)(i)] that notwithstanding anything contained in this sub-clause and sub section (2) of this section, in case ninety percent 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.

Accordingly, right issue may be open for a period lesser than fifteen days for acceptance and thereafter it shall be deemed to be declaimed [when read with 62(1)(a)(i)] and notice for such offer shall be dispatched for any lesser period than three days before the opening of issue[when read with Section 62(2)].

Presently a company may offer its securities to to employees under a scheme of employees’ stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed.

Now, for private companies ordinary resolution shall be sufficient.

Restrictions on purchase by company or giving of loans by it for purchase of its shares [Section 67]:

This section shall not apply to private companies –

(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 fifty crore rupees, whichever is lower; and

(c) such a company is not in default in repayment of such borrowings subsisting at the time of making transactions under this section.

Prohibition on acceptance of deposits from public [Section 73(2)]:

Clause (a) to (e) of Section 73(2) Shall not apply to a private company which accepts from its members monies not exceeding one hundred percent 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.

Rules May be amended very soon.

Say No to Corporate Governance [Section 101 to 107 and 109]:

We should appreciate rare good drafting for exempting private companies from all major corporate governance provisions.

These Sections shall apply unless otherwise specified in respective sections or the articles of the company provide otherwise.

First check where “otherwise is provided” in these sections. There is only one stance. Section 103(1)(b) provide minimum quorum for meeting of company shall be two members personally present.

Article of a private company may make its own law regarding notice of meeting [Section 101], statement annexed to meeting [Section 102], quorum for meeting subject to minimum two members personally present [Section 103], chairman of the meeting [Section 104], proxies [Section 105], restriction to voting rights [Section 106], voting by show of hands [Section 107] and demand for poll [Section 109]. Section 108 which deals with electronic voting still apply as power is reserved with executives.

Consequently, Secretarial Standards issued by ICSI may need revision or hard stand of ICSI may make these exemptions a joke. Will governance surrender?

Moot question is, whether MCA approved Secretarial Standards just to disapprove its approval?

Filing of Resolutions [Section 117(3)(g)]:

This clause shall not apply to private companies. Accordingly, Private company is not required to file resolutions passed in the board meeting and listed in Section 179(3) and rule made there under.

Please, recall that in recent the Companies (Amendment) Act 2015 a proviso was inserted to Section 117(3)(g) effecting that no person shall be entitled under Section 399 to inspect or obtain copies of such resolutions. Thereafter, all resolutions filed with the registrar was only meant for scanning of scams in the companies by the government.

Consequently, Government has exempted private companies from that legal scanning also. May I term it as Ease of Doing Scam? #EaseOfDoingScam

Eligibility, qualifications and disqualifications of auditors [Section 141(3)(g)]:

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 reappointment holding appointment as auditor of more than twenty companies; shall not be eligible for appointment as an auditor of a company other than one person companies, dormant companies, small companies and private companies having paid-up share capital less than one hundred crore rupees.”

Effective limit for audit shall be 20 public companies which are neither small nor dormant.

Right of persons other than retiring directors to stand for directorship [Section 160]:

This Section shall not apply to a private company.

Appointment of directors to be voted individually [Section 162]:

This Section shall not apply to a private company.

Restrictions on powers of Board [Section 180]:.

This Section shall not apply to a private company.

Disclosure of Interest by Director [Section 184(2)]:

Presently, every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into shell disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.

In case of private company, interest director may participate in such meeting after disclosure of interest.

Loan to directors [Section 185]:

This section shall not apply to private companies –

(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 fifty crore rupees, whichever is lower; and

(c) such a company is not in default in repayment of such borrowings subsisting at the time of making transactions under this section.

Related party Transaction [Second Proviso to Section 188(1)]:

This Proviso provides that no member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.

This provision is not applicable to private companies. This is a welcome decision.

Appointment of managing director, whole-time director or manager [Sub – section (4) and (5) of Section 196]:

This provision is not applicable to private companies.

All these personnel may be appointed in Board meeting in case of private company. Section 197 is already not applicable to private companies.

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