Introduction

Companies Act, 2013, when introduced, brought major changes in compliances for private companies. Large number of the compliances were added for private companies under the Companies Act, 2013 (“the Act”), as compared to the compliances under the Companies Act, 1956. This resulted into conversion of many private companies into LLPs. To overcome these difficulties faced by private companies, the Ministry of Corporate Affairs has issued exemption Notification dated 05/06/2015 under section 462 of the Companies Act, 2013 providing necessary exemptions to private company other than subsidiary of public companies from the provisions of Companies Act, 2013. This article shall provide a summary of the exemptions introduced.

Share Capital

1. Kinds of Share Capital
   • Section 43 of the Act defines the kinds of share capital a company can have.
   • As per the exemption notification, Section 43 of the Act shall not apply to a private company, where its Memorandum or Articles so provide.
   • Hence, where memorandum and articles permit, a private company will have flexibility on its share capital structure.
2. Voting Rights on Share Capital
   • Section 47 of the Act talks about the voting rights on the share capital.
   • As per the exemption notification, Section 47 of the Act shall not apply to a private company, where it’s Memorandum or Articles so provide.
   • Hence,
     • There are relaxations on provisions relating to issue of shares with differential rights,
     • Preference shareholders in private companies will not have a right to vote on all shareholder resolutions even when their dividends have not been paid for a period of two years.

3. Further Issue of Share Capital
   • Section 62 of the Act talks about further issue of share capital.
   • There was a restriction in this clause that the offer of shares to the existing shareholders shall not be open for a period less than 15 days and more than 30 days from the date of offer. However a relaxation has been granted to the private companies, whereby the period of offer can be lesser than 15 days, if 90% of the members of the company have consented to the same in writing or in electronic mode.
   • The provisions for issue of ESOPs have also been simplified for private companies, with now only an ordinary resolution being required instead of a special resolution.
4. Restrictions on purchase by company or giving of loans by it for purchase of its shares
   • Section 67 of the Act lists down the restrictions on purchase by company or giving of loans by it for purchase of its shares.
   • As per the exemption notification, Section 67 of the Act shall not apply to a private company which fulfills the following conditions:
     • No body corporate has invested any money in its share capital,
     • Its borrowings from banks or financial institutions or any body corporate is < twice its paid up share capital or Rs. 50 crore, whichever is lower, and,
     • It is not in default in repayment of borrowings subsisting at the time of entering into such transactions.

Deposits

1. New mechanism and conditions for acceptance deposits have been introduced under Section 73 of the Act. The conditions under this section being very stringent, have created a major problem in funding of the private companies.
2. Hence, an exemption has been granted for certain conditions laid down for acceptance of deposits by a private company if:
   • It accepts from its members monies <= 100% of aggregate of the paid up share capital + free reserves, and
   • It files the details of monies so accepted to the Registrar in such manner as may be specified.
3. If the deposits are accepted as per the above criterion, the private companies shall be exempt from following the requirements relating to acceptance of deposits noted below:
   • Issue of a circular to its members, along with a statement showing financial position of the company, its credit rating, total no. of depositors and such other details,
   • Filing a copy of the circular along with the statement as per 1above with the Registrar,
   • Depositing an amount which is atleast 15% of the amount of deposits maturing during that financial year and the following year with a scheduled bank in a separate account called the deposit repayment reserve account,
   • Providing such deposit insurance in such manner and to such extent as may be prescribed,
   • Certifying that the company has not committed any default in the repayment of deposits accepted or payment of interest on such deposits.

Loan to Directors, etc

1. As per Section 185 of the Act, a company cannot give loans or guarantee or security in connection to a loan to directors or persons in whom a director is interested.
2. As per the exemptions provided under the latest notification, this section 185 of the Act will not apply to a private company if it fulfills the following criterion:
   • It does not have any shareholders who are body corporates,
   • Its borrowings from banks or financial institutions or anybody-corporate is < twice of its paid up share capital or Rs. 50 crore, whichever is lower, and
   • It has no default in repayment of such borrowing subsisting at the time of entering into loan transaction.
3. Hence, on fulfillment of the above criterion, a private company will be able to provide loan or guarantee or security in connection to a loan to directors or persons in whom a director is interested.

Shareholders and Board Meetings

1. Holding of Shareholders’ meetings
   • The following requirements relating to holding of shareholder meetings, as prescribed in section 101 to 107 and 109 of the Act will not apply to a private company if the articles of association provide otherwise:
     • Notice of meeting,
     • Statement to be annexed to the notice,
     • Quorum for meetings,
     • Chairman of meetings,
     • Proxies,
     • Restrictions on voting rights,
     • Voting by show of hands and demand for poll.

2. Non-filing of certain resolutions with Board
   • Resolutions passed by the Board for the following matters will not be required to be filed with Registrar by a private company:
     • Making calls on shareholders’ for unpaid money on their shares,
     • Authorizing buy-back o securities under section 68 of the Act,
     • Issuing securities including debentures, in or outside India,
     • Borrowing monies,
     • Investing funds of the company,
     • Granting loans, guarantee or providing security in respect of loans,
     • Approval of financial statements and board’s report,
     • Diversification of business,
     • Approval of amalgamation, merger or reconstruction,
     • Taking over a company or acquiring controlling or substantial stake in another company,
     • Any other matter that may be prescribed.
   • Hence, this exemption will relieve the private companies from having to file resolutions relating to sensitive and confidential decisions with the Registrar.
3. Participation in meeting after disclosure of interest by Directors
   • Section 184(2) of the Act requires a director to disclose his interest at the meeting of the Board in which the contract or arrangement in which he is interested is discussed. It also restricts the director from participating in such meetings.
   • As per the new exemptions, now an interested director of a private company may participate in such meeting after disclosure of his interest.

Appointment of Directors, etc.

1. Right of persons other than retiring directors to stand for directorship
   • The process for persons other than retiring directors to stand for directorship has been relaxed for private companies.
   • As per Section 160 of the Act, any person other than retiring director intending to stand for directorship had to
     • Leave at the registered office of the company, a notice in writing about his intention to stand for directorship, not less than 14 day before the meeting,
     • Pay a deposit of Rs 1 Lakh.
   • Now Section 160 is not applicable to private companies and hence the above requirements need not be fulfilled.
2. Appointment of directors to be voted individually
   • Section 162 of the Act says that a motion for the appointment of two or more persons as directors of the company by a single resolution shall not be moved unless a proposal to move such a motion has first been agreed to at the meeting without any vote being cast against it. Any resolution in contravention of the above shall be considered void, whether any objection against it was taken or not.
   • Now, Section 162 shall not apply to private companies.
3. Appointment of managing director, wholetime director or manager
   • For appointment of managing director, whole-time director or manager by a private company, now, there is no requirement that the terms and conditions of such appointment and remuneration payable be approved by the Board of Directors at its meeting, then shall be subjected to approval by a resolution at the next general meeting of the company and then by the Central Government in case such appointment is at variance to the conditions specified in that Schedule.

Powers of the Board

The restrictions under section 180 of the Act on the following powers of the board, which were earlier exercisable only with the consent of the company by special resolution have also been removed for private companies.

1. Power to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company,
2. Power to invest in trust securities the amount of compensation received by it from any merger or amalgamation,
3. Power to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.

Related Party Transactions

1. For private companies, transactions with the following parties shall not be considered to be a related party transaction:
   • Any company which is a holding, subsidiary or an associate company of such company,
   • Any company which is a subsidiary of a holding company to which it is also a subsidiary.
2. Every related party, including an interested party, can now vote at a shareholder meeting on resolutions to approve related party transactions.

Auditor Appointments

For appointment of auditors by private companies, when determining the eligibility of the auditor, now, while calculating the limit of 20 companies, the following companies shall be excluded from such limit:

1. One person companies,
2. Dormant companies,
3. Small companies, and
4. Private companies having paid-up share capital < Rs.100 crore.