Untitled35On June 5, 2015, The Ministry of Corporate Affairs (MCA) issued a notification under section 462 of The Companies Act 2013 for exempting private companies from many compliances.

The private companies in India have already been subjected to unprecedented compliances required under the Companies Act, 2013 (the “Act”). Ever since July 2014 when the draft of an exempting notification was placed before the Parliament, the corporate sector in the country, primarily the small and medium companies, and the thousands of foreign-owned or controlled companies which are mostly private companies, have been anxiously waiting for this notification.

Summary of such exemptions to private companies other than subsidiary of the Public companies are as follows:-

Compliance Burden Reduced: Filing of Board Resolutions in MGT-14 waived for Private Companies:-

One of the major relaxations for private companies is the exemption from filing board resolutions under section 179(3) of the Act. This section requires companies to file some 14 items of board resolutions with the Registrar of Companies in a form called MGT 14, has completely been exempted in case of private companies, by snapping the connection between section 117(3)(g) and section 179(3). Therefore, private companies will now need to file only MGT 14 in case of special resolutions. In terms of compliance burden, this is a major relief.

Note, however, that section 179(3) itself has not been exempted. That is, wherever there is a matter being one of the items listed in this sub-section, the resolution of the board will still be required but filing of MGT 14 for board resolution is no more required.

Participation of Interested Directors: Section 184:-

Another exemption relates to section 184(2). This section provides that the directors of a private company must refrain from participating in a board meeting where a matter in which they are interested is to be discussed. This is causing practical hardship in case of private companies, which actually do not have any independent directors, and therefore it is not expected that there will be any director who is uninterested in the matter. The notification provides that an interested director may participate only after disclosure of such person’s interest. However, curiously, one of the most burdensome disclosures in case of private companies – disclosures by all directors about their shareholdings, and every time there is a change therein – still remains intact [section 184 (1)].

Restriction on Powers of Board No Longer Applicable to Private Companies:-

This relaxation brings us back to the position as under section 293 of the Companies Act, 1956 (the “Act 1956”). That is to say, the exercise of borrowing powers by private companies will not necessitate any special resolution.

Loans by Private Companies:-

Section 185 is serving as a major hurdle for banking transactions, particularly for guarantees and collaterals. This is one provision where banks themselves are greatly concerned as they are finding it increasingly difficult to seek guarantees and collaterals from related entities.

A partial exemption has now been granted to private companies giving a loan, providing a guarantee or offering a security in connection with a loan taken by a sister concern. There are 3 cumulative conditions for availing the exemption:-

  1. There is no body corporate shareholder in the lending/guaranteeing company;
  1. The lending company’s aggregate borrowings from other bodies corporate or banks or financial institutions is limited to the lower of:-
  • 2 times of the net worth of company; or
  • 50 crores; and
  1. There is no pending default in repayment of such borrowings by the lending company.

It is worthwhile to note that the limit on borrowings includes borrowings by way of inter-corporate deposits as well, thereby effectively serving as a limit on the debt-to-equity ratio. Also the fact that the private company should not have a corporate shareholder makes the exemption largely meaningless, since inter-corporate shareholdings are a preponderant reality of the corporate world. Moreover, what malaise is this limitation seeking is redress is far from clear. These futile limitations in granting exemptions puts a big question mark on the philosophy of the new Act in extending all provisions to all companies, and keeping carve-outs to a power of administrative notification.

Loans against Its Own Securities:-

Section 67 of the Act prohibits the purchase of a company’s own shares, or the providing of loans against its own shares. There are, actually, 3 related sections – section 66 prescribing the process of reduction of capital, section 67 prohibiting a company from buyback of its shares unless section 66 is complied with, and from lending against its own shares, and section 68 laying down the conditions and process of buy back of shares.

Exemption has been given from the provision of section 67, subject to the following conditions:-

  1. Where no other body corporate has invested any money;
  1. Borrowing from banks, financial institutions or body corporates is less than double of its paid up capital of Rs. 50 crore, whichever is lower.
  1. The above qualifying private company should not have defaulted in repayment of borrowings as may exist on the date of the transaction under the section.

Interestingly, there is no exemption either from section 66 or section 68. This implies that the exemption is only one for lending against shares. If the idea of the exemption was to relax the conditions for buy back of shares, there would have been exemption from section 68 or section 66 as well. It does not sound reasonable that a limited liability company would have been let free to buy its shares without any restraint at all.

Deposits from Members:-

Until March 30, 2015, there was a lot of debate on whether deposits taken by private companies from its members taken under the Act 1956, that is, before April 1, 2014 also had to comply with the strict provisions of new Act and hence requiring compliance with filing and repayment pursuant to section 74 and its allied rules. MCA vide the General Circular 05/2015 dated March 30, 2015 granted to private companies relief from this compliance clarifying that such amounts taken from directors/directors’ relatives and members under the provisions of the Act 1956 will not constitute deposit under the new Act.

The proposed exemption to private companies for accepting loans/deposits from their shareholders, up to a limit of 100% of net worth, had found its place in the final text and is also now a part of the final notification. It is notable that shareholders’ loans in case of private companies were fully exempted from the purview of deposit restrictions under the Act 1956. The Deposit Rules under the new Act brought that restriction, purportedly owing to deposit scams in the Eastern region. As it stands in the final text of the notification, a private company may accept deposits from its shareholders, up to a limit of 100% of its net worth. This is, of course, subject to a filing requirement. Note that a violation of sections 73 and 74 attracts major penal consequences, with imprisonment up to 7 years and a fine up to Rs. 10 crores. The offence is non-compoundable.

Limit on Company Audits:-

The limit of 20 on company audits will now exclude all one person companies, dormant companies, small companies, and private companies having a paid up share capital of less than Rs. 100 crores. In the draft notification, private companies were completely excluded from the limit.

Right of Persons Other than Retiring Directors to Stand for Directorship:-

Provisions of section 160 shall not apply in case of private companies. Similar was the position under section 257 of the Act 1956.

Appointment of Directors No Longer to be Voted Individually:-

There was no specific exemption to a private company under section 263 in the Act 1956. However, seemingly the lawmakers thought this to be a very vital provision of concern to private companies and have therefore removed private companies from the ambit of section 162.

Relaxation Withdrawn in Case of Related Party Transactions:-

There is a major step back in the exemption pertaining to related party transactions (“RPTs”). The draft notification had proposed a full exemption to private companies from section 188 pertaining to RPTs. The final notification restores restrictions on RPTs in case of private companies, with the following riders:-

  1. One of the special features of general meeting approval in case of RPTs is that the resolution has to be approved by a vote of the minority only. Related parties are not allowed to vote on such resolution. This provision has been taken off in case of private companies.
  1. Another relaxation is that in the definition of “related parties” in section 2(76), holding-subsidiary relationships, and investor-associate relationships have been excluded from related party relationships. The net result of these changes will be as follows:-
  • It is most commonplace in case of private companies to enter into RPTs. Private companies cannot be dealing with parties at arms-length, as it is sheer commonsense to say that private companies deal with parties close to them, rather than those who are unrelated.
  • Most transactions by or between private companies will still come within the ambit of section 188 since most of these transactions are covered by the “common director” or “common shareholder” clause of section 2(76), and not by holding-subsidiary or investor-associate relationships.
  • Once a transaction comes under section 188, it will require board and general meeting approval, if the transaction size, thresholds are crossed. RPTs may come under the section due to the relative contract value.
  • Hence, most RPTs will require prior general meeting resolution. The only saver is that in such a general meeting, even related parties may vote. Thus, getting the sanction of the general meeting may not be a problem, but the section will remain a compliance burden on private companies.

Other Exemptions:-

Section 43 and 47- Kinds of share capital &voting rights:-

Unless the memorandum of association (“MoA”) or articles of association (“AoA”) of private companies provides for it, the same shall not be applicable. Alternatively, where the MoA/AoA of a private company provides exemption from the same, it shall not be applicable.

Section 62(1)(a)(i) – Further issue of share capital:-    

Provisions with regard to time period of offer in case of rights issue are exempted for private companies.

Existing sec 62 (1) (a) (i):-

Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares; such shares shall be offered:-

  1. To persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:-
  • The offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

Modification in sec 62(1) (a) (i):- 
Shall apply with following modifications:-
In clause (a), in sub-clause (i), the following proviso shall be inserted, namely:-

Provided that notwithstanding anything contained in this sub-clause and sub-section (2) of this section, in case ninety per cent, 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.

Section 62(2):-

Requirement of sending the notice 3 days prior to opening of the issue by way of specified means under rights issue is now exempted.

Section 62(1)(b) – Further issue of share capital:-

Shall apply except that instead of special resolution, ordinary resolution would be required.

Existing sec 62 (1) (a):-

  1. Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered:-
  • 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.

Modification in sec 62 (1) (b):-

In clause (b), for the words “special resolution”, the words “ordinary resolution” shall be substituted.

Sections 101 to 107 and section 109:-  

  • Notice of meeting, Statement to be annexed to notice, Quorum for meetings, Chairman of meetings, Proxies, Restriction on voting rights, Voting by show of hands & Demand for poll.
  • Unless a section specifically requires or it is provided in the articles of a private company, the provisions with respect to general meetings shall not apply.

Section 196(4) and 196(5) – Appointment of managing director whole-time director or manager:-

  • Provisions with respect to approval of terms and conditions of appointment including remuneration of managerial personnel and validity of actions done by them where appointment is not in accordance with the provisions of the said section, is not applicable to private companies.
  • On the basis of above, we can say that a starting has been made by way of the exempting notification and by the Companies (Amendment) Act 2015 now all eyes are on the Committee, which is to review the implementation of the Act.

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