India: Exemptions For Private Limited Companies

The (Indian) Companies Act, 2013 (2013 Act) which replaced the (Indian) Companies Act, 1956 (1956 Act) brought significant changes for private limited companies. Under the 2013 Act, most of the exemptions which were available to private limited companies under the 1956 Act were withdrawn. As a result, private limited companies are subject to a number of additional compliance requirements. Several concerns on these aspects were raised by various stakeholders.

In response, the Indian Government had, in exercise of its inherent powers under the 2013 Act, introduced a draft notification before the Indian parliament in July, 2014 proposing to exempt the application of certain provisions to private limited companies. Upon receipt of approval from both the houses of the Indian Parliament, the Indian Government has now issued a notification dated 5 June, 2015 (Exemption Notification) in respect of these exemptions. The Exemption Notification will become law only upon publication in the official gazette.

We have briefly summarised the exemptions available to private limited companies under the Exemption Notification.

1) Related Party Transactions

Under the 2013 Act, related party transactions require board approval and in some instances shareholder approval by way of a special resolution. For this purpose, the definition of a 'related party' has now been modified for private limited companies. The definition no longer includes: (a) holding companies, (b) subsidiary companies, (c) associate companies; or (d) subsidiaries of holding companies of the private limited company (collectively the "Exempted Entities"). Therefore, transactions of a private company with Exempted Entities will not be considered to be a "related party transaction" and will not require compliance with the provisions of Section 188 of the 2013 Act.

In addition, Section 188 of the 2013 Act places some restrictions on shareholders who are 'related parties'. Such related parties are not permitted to vote at a general meeting of shareholders for a resolution to approve any contract or arrangement between the company and a related party. Pursuant to the Exemption Notification, this restriction will not apply to private limited companies.

2) Kinds of Share Capital

The 2013 Act only provides for 2 kinds of share capital (i.e. equity shares and preference shares). While shares with differential rights as to voting, dividend etc. were permitted, such permissions were subject to meeting certain conditions. These restrictions have now been removed for private limited companies. Private limited companies are free to issue any kind of shares subject to their charter documents (i.e. the memorandum and articles of association) providing for it. This relaxation will help private limited companies looking to raise capital and issue special classes of shares to investors.

3) Rights Issue Offer Period

Section 62 of the 2013 Act provides that:

(a) an offer of rights issue of shares shall be by notice to be despatched to the existing shareholders at least 3 days before the opening of the issue; and

(b) the offer is to be kept open for minimum of 15 days and maximum of 30 days.

This requirement has now been relaxed for private companies. The timelines specified above can be reduced if atleast 90% of the shareholders have given their consent in writing or in electronic mode.

4) Employee Stock Option Plan

Under the 2013 Act, an issue of shares to employees under an employee stock option plan required the passing of a special resolution. This requirement has been waived for private limited companies and private limited companies will now only require an ordinary resolution for such an issuance.

5) Deposits from Members

Under the 2013 Act, companies are permitted to accept deposits from its members subject to fulfilment of certain conditions. These conditions have been laid out in (a) Section 73 of the 2013 Act; and (b) the Companies (Acceptance of Deposit) Rules, 2014. These conditions shall not be applicable to private limited companies accepting deposits from members which are less than 100% of its paid up share capital and free reserves. However, such exempted private companies are required to file the details of such deposits from members with the Registrar of Companies (ROC).

6) Power to Purchase Own Securities

Section 67 of the 2013 Act restricts companies from buying its own shares or giving of loans for purchasing its shares. These will not apply to the private limited companies which meet the following criteria:

a) no body corporate which has invested in the share capital of the company;

b) the borrowings from banks, financial institutions or bodies corporate is less than (i) two times its paid up share capital; or (ii) INR 500 Million, whichever is lower; and

c) there are no defaults in the repayment of such borrowings subsisting at the time of the proposed transaction.

7) Loans to Directors

Under Section 185 of the Companies Act, 2013 (2013 Act), companies are not permitted to:

(a) advance loans to their directors or to any 'person' in whom/ which such directors are interested (Restricted Persons); or

(b) provide any guarantee or security in connection with any loan obtained by their directors or by a Restricted Person.

The provisions of Section 185 are not applicable to private limited companies which meet certain criteria. The criteria are the same as those applicable for the purpose of exemption to private limited companies from the provisions of Section 73 and which have been set out in point (6) above.

8) Filing of Board Resolutions

Currently, all companies are required to file with the ROC copies of all resolutions passed by its board of directors in respect of the matters set out in Section 179 (3) of the 2013 Act. Private limited companies have now been exempt from complying with this requirement.

9) Eligibility of Auditors

Section 141 (3) (g) restricts companies from engaging as auditor a person (including a partner of a partnership firm) who is an auditor of more than 20 companies. The Exemption Notification has modified this restriction. The appointment of a person as an auditor of (i) one person companies; (ii) dormant companies; (iii) small companies; and (iv) private limited companies having a paid up share capital of less than INR 1,000 Million, will not be taken into account for the purpose of determining the eligibility of an auditor under Section 141 (3) (g) of the 2013 Act.

10) Restriction on Board Powers

Section 180 of the 2013 Act lays down certain matters which cannot be transacted by the board of directors without obtaining the approval of shareholders at a general meeting by way of a special resolution. Pursuant to the Exemption Notification, these restrictions will no longer be applicable to private limited companies.

11) Disclosure of Directors' Interest

The 2013 Act requires directors of companies, who are interested in a contract or arrangement to disclose their interest at the board meeting in which such contract or arrangement is discussed. Further, the disclosing directors are not permitted to participate in such board meetings.

While the disclosure requirement continues to apply, the interested directors of private limited companies are now permitted to participate in such board meetings after the disclosure of interest has been made.

12) Appointment and Remuneration of Senior Management

Section 196 (4) and (5) of the 2013 Act deals with the appointment of managing directors, whole time directors and managers (Senior Management).

Section 196 (4) states that any appointment of the Senior Management by the board of directors shall be subject to the approval of shareholders at a general meeting. The companies appointing Senior Management are also required to comply with inter alia the terms and conditions set out in Schedule V of the 2013 Act. In case of failure to comply with the terms and conditions specified in Schedule V, the approval of the central government is required to be obtained by the relevant company. Each company appointing Senior Management shall also file a return of such appointment with the ROC in the prescribed format.

Section 195 (5) also clarifies that in the event the shareholders at a general meeting do not approve the appointment of the Senior Management by the board of directors, such non approval shall not result in the actions of the Senior Management prior to the general meeting becoming invalid.

Pursuant to the Exemption Notification, private limited companies are no longer required to comply with Section 196 (4) and (5) of the 2013 Act.

13) Governance and Administration Related Provisions

The Exemption Notification has exempted private limited companies from the provisions of:

(a) Section 101 (notice of meeting);

(b) Section 102 (statement to be annexed to notice);

(c) Section 103 (quorum for meetings);

(d) Section 104 (chairman of meetings);

(e) Section 105 (proxies);

(f) Section 106 (restriction on voting rights);

(g) Section 107 (voting by show of hands);

(h) Section 109 (demand for polls);

(i) Section 160 (retiring directors and their appointment as directors); and

(j) Section 162 (directors' appointment to be voted individually).

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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