India: Brief Note With Regard To The Exemptions Granted To Private Limited Companies Vide Notification Dated 5th June 2015

Last Updated: 20 October 2015
Article by S.C. Vasudeva & Co.

1. Section 43 of the Act requires that a share capital of a company limited by shares shall be of two kinds i.e. equity and preference. This section shall not apply to a private limited company where the Memorandum and Articles of Association so provide for a class of shares other than equity / preference. Further, if the Memorandum and Articles of Association of the company so provide, provisions relating to voting rights as contained in section 47 of the Act will not be applicable to a private limited company.

2. Section 62 of the Act deals with issuance of further shares and provides that the same shall be issued to the holders of the equity shares in the same proportion in which they are holding shares in the capital of the company. Sub-clause (a)(i) of subsection (1) of the said section provides that the offer shall be made by a notice specifying the number of shares offered and requiring the shareholder to subscribe for such shares within a time not being less than 15 days and not exceeding 30 days from the date of the offer. A proviso is being added by the aforesaid notification so as to provide that in case 90% of the members of a private company have given their consent in writing or in electronic mode, period less than that specified in the above sub-clause may be given for issuance of such shares. Similarly, the period of 3 days specified in sub-section (2) of section 62 of the Act for dispatch of notice for making the aforesaid offer can be reduced, if the approval is taken in a similar manner from the members of a private limited company .

3. Section 62(1)(b) of the Act deals with the issuance of shares to employees under a scheme of employees' stock options. These can now be issued by passing an ordinary resolution instead of a special resolution by a private limited company.

4. Section 67 of the Act which deals with the restrictions on purchase by company or giving loans by it for purchase of its shares, shall not apply to a private company which complies with the following conditions:-

a) No other body corporate has invested any money in such a company;

b) The borrowings of such a company from banks or financial institutions or any body corporate are less than twice its paid up share capital or fifty crore rupees, whichever is lower; and

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

5. Acceptance of deposits from members of a private company has been simplified by providing that clauses (a) to (e) of subsection (2) of section 73 of the Act shall not apply to a private company which accepts from its members monies not exceeding one hundred per cent of the aggregate of the paid up share capital and free reserves. It has been clarified that such company shall have to file return of the money so accepted with the Registrar of Companies in such manner as may be specified.

6. Section 101 to section 107 and section 109 of the Act shall apply to a private company unless otherwise specified in respective sections or the Articles of Association of the company provide otherwise. These sections deal with the following aspects:-

101 – Notice of General Meeting

102 – Explanatory statements

103 – Quorum

104 – Chairman of the Meeting

105 – Proxies

106 – Restrictions on voting rights

107 – Voting by show of hands

109 – Demand for a poll.

7. Section 117 of the Act deals with filing of resolutions and agreements with the Registrar of Companies. A resolution is required to be filed with the Registrar for exercise of certain powers by the Board to make calls, to authorize buy back of securities etc; required under section 179(3) of the Act. Such a resolution need not be filed with the Registrar of Companies in case of a private limited company by virtue of the aforesaid notification.

8. The restrictions imposed for being appointed as an auditor for more than 20 companies has been made inapplicable to one person companies, dormant companies, small companies and private companies having paid up share capital of less than Rs. 100 crores. It may be noted that the ICAI has earlier notified a limit of 30 companies, (both public and private). However, this notification was in relation to erstwhile section 224 of the Companies Act, 1956.

9. Section 160 of the Act deals with the provisions relating to right of persons other than retiring directors to stand for directorship. The same has been made inapplicable to a private limited company.

10. Provisions relating to appointment of directors to be voted individually contained in section 162 of the Act have been made inapplicable to a private limited company.

11. Provisions of section 180 of the Act deal with restrictions on powers of Board in respect of sale, lease of undertaking, borrowings in excess specified limits, making of investments etc.; these powers can be exercised by passing a special resolution. The provisions as contained in the said section would not be applicable to a private limited company.

12. Sub-section (2) of section 184 deals with the disclosure of interest by a director in a contract or arrangement and restrains him from participating in the meeting of the Board in which such contract or arrangement is discussed. It has been provided in the notification that in case of private limited such a director may participate in the meeting after disclosure of his interest.

13. Provisions relating to loans to directors have been made inapplicable to following category of private limited 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 of its paid up share capital or fifty crore rupees, whichever is lower; and

c) Such a company has no default in repayment or such borrowings subsisting at the time of making transactions under this section.

14. Section 188 of the Act deals with Related Party Transactions. Henceforth, any company which is a holding, subsidiary or an associate of such company or a subsidiary of a holding company to which it is also a subsidiary shall not be considered a related party in case of a private limited company for the purposes of ascertaining Related Party Transaction under section 188 of the Act. Further, second proviso to the said section requires 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 proviso has been made inapplicable to a private limited company.

15. Section 196 of the Act deals with the appointment of Managing Director, Whole Time Director or Manager. Sub-section (4) of the said section provides for the approval of the appointment by a resolution at the next General Meeting of the company and by the Central Government in case such appointment is at variance to the conditions specified in Schedule-V which deals with the terms of appointment and remuneration to aforesaid managerial personnel. Sub-section (5) of the aforesaid section provides where the appointment of such managerial personnel is not approved by the company at the General Meeting, any acts done by him before such approval shall not be deemed to be invalid. These two subsections i.e. sub-section (4) and (5) of section 196 of the Act have been made inapplicable to a private company.

The Key

These are welcome amendments and would definitely provide relief to private limited companies in respect of related party transactions, acceptance of deposits, issuance of ESOPs, appointment of directors etc. Further it also does away with the limit of 20 companies for appointment as auditor in respect of private limited company and other specified companies, a relief to the audit profession.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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