Yesterday, the government has
placed a draft notification for comments on the MCA Website relating
to exemptions granted to private companies. Private companies are closely held
business entities that are not permitted to invite the public to subscribe to
their shares or accept deposits from the public. Private companies are defined
under the Companies Act, 2013 (Companies Act) to inter
alia mean a company,
which restricts the right to transfer its shares and limits the number of its
members to 200.
The earlier Companies Act had a separate class of companies,
namely, private companies that are subsidiaries of public companies on whom
certain additional regulatory requirements were imposed in line with public
companies. Under the Companies Act have been included in the definition of
public company. The proposed amendments would not cover these companies.
The proposal is to create a separate class of companies having
50 or less members. Certain restrictions have been proposed to be withdrawn
only for companies with 50 or less members. This will make the applicability of
the provisions fluid and the benefit of having companies with 200 members for a
private company is diminished. Interestingly, the proposals do not mention a small
company and are considering the creation of a third class of private companies
that have 50 members or less.
In general, the objective of the proposed amendments appears to
be to allow private companies to regulate their own affairs, as was the case under
the previous companies act. The real impact of the proposals will be seen only
through the actual text of the legislative amendments. The move is certainly
something that would be applauded by industry, corporates as well as
professionals like company secretaries, auditors and legal professionals.
The major changes proposed to be made are highlighted below:
1) Kind of Capital and Voting
Rights
The provisions of Section 43 and 47 of the Companies Act dealing
with equity and preference share capital and voting rights have been made
wholly inapplicable to private companies. This takes it back to the position
under the Companies Act, 1956 (the previous Companies Act) in respect of kinds
of share capital that may be issued by companies and voting rights available to
members. Private companies may issue differential shares with differential
voting rights, which will be governed largely by its articles. This would offer
a big relief to companies that are starting a new business or to investors, who
can minimize their risk by subscribing to shares with differential rights as
compared to shares with same rights. This should be welcomed by industry and
other practising professionals.
2) Further issue of shares
Timelines have been reduced for acceptance of rights shares
under Section 62(1)(a) by members. This would also be a welcome move as it will
speed up the process in private companies where the shareholding is not diverse
or scattered. However, the suggested amendment goes beyond the prescription of
the previous Companies Act, by making the timeline the maximum time for
reference.
There is a reference to
amendment of timelines under Section 62(2) but no suggestions appear in the
table. It appears to have been missed out.
3) Issue of ESOP in Private
Companies
The requirement of a special
resolution for issuing shares to employees under an ESOP scheme has been done
away with. If the suggested change is implemented private companies may issue
ESOP by way of an ordinary resolution of its members. In addition to the
special resolution, the Companies (Share Capital and Debenture) Rules, 2014
require certain other requirements as well of an unlisted company including inter
alia the
following:
a) Restriction on quantum of sweat
equity shares to be issued at 15% of existing paid up share capital or value of
INR 5 crore whichever is higher, with a total cap of 25% of paid up share
capital at all times,
b) Lock-in of 3 years on the sweat
equity issued,
c) Valuation of intellectual property to
be made by a registered valuer, and
d) Treatment of sweat equity as part of
compensation package of the concerned employee.
In addition to the proposed changes to the Companies Act in this
behalf, appropriate modifications would need to be made to the Companies (Share
Capital and Debenture) Rules, 2014, if any real respite is proposed to be
offered to private companies as the other conditions imposed seem to be more
onerous than the passing of a special resolution. However, the government may
choose to keep reporting requirement of such ESOP issue to ensure that
appropriate information in that behalf is captured.
4) Deposits
The regulation prohibiting acceptance of deposits from public,
specifically, section 73 (2), which permits a company to accept deposits from
its members subject to certain conditions stipulated therein, will not
applicable to private companies having 50 or less members. Such a company,
however, cannot accept monies exceeding 25% of aggregate paid up capital and
free reserves or 100% of paid up capital whichever is higher, subject of course
to compliance with reporting requirements.
5) Notice of meetings and other
business of companies
Sections 101 to 107 and 109 that
deal inter alia with notice of meetings, quorum, chairman,
voting at meetings and poll, have now been made applicable only to public
companies except in the event that:
a) it is otherwise specified in the
section; and
b) unless the articles of association of
the private company otherwise provide.
This amendment was necessary as it is against the very spirit
of, functioning of private companies, for the law to regulate their internal
processes and mechanisms. The idea here appears to be to arrive at the same
position as the 1956 Act. However, appropriate amendments to the rules may also
be mandated
6) Qualification of auditor
The restriction contained in Section 141(3) (g) which disallows
a person who is in full time employment elsewhere, or a person or a partner of
a firm holding appointment as auditor, if such person is at the date of
appointment holding appointment of more than 20 companies, has now been made
inapplicable to a private limited company. This would be a big relief to
auditing firms as well as private companies, particularly auditors of large
group companies.
7) Appointment of directors
The government has suggested that Section 160 and 162 be wholly
made inapplicable to a private company. This move is positive and in keeping
with the spirit that private companies should be allowed to regulate its own
business. Proposal for moving resolution for appointment of two or more
directors as well as provisions relating to non-retiring director seeking
appointment to the office of director do not make any sense in the context of a
private company which is closely held.
The original position under the previous Companies Act has been
sought to be reinstated.
8) Restriction on the power of
board
Restriction of powers of the board, hitherto applied to all
companies. The suggestion of the government is that the requirement of special
resolution for matters of importance listed in Section 180 shall not apply to
private companies having 50 or lesser number of members. The matters referred
to section 180 are:
a) to sell, lease or otherwise dispose
of the whole or substantially the whole of the undertaking of the company or
where the company owns more than one undertaking, of the whole or substantially
the whole of any of such undertakings.
b) to invest otherwise in trust securities
the amount of compensation received by it as a result of any merger or
amalgamation,
c) 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:
d) to remit, or give time for the
repayment of, any debt due from a director.
The proposed change is in line with the provisions under the
previous Companies Act.
9) Loans to directors
The much talked about and debated provisions of Section 185
providing restriction on a company from advancing any loans or providing any
other security to any of its members have now sought to be made inapplicable to
a private limited company subject to the following conditions:
a) the private company not having
borrowings from other body corporates or financial institutions of more than
twice its paid up capital or INR 50 crore whichever is lower;
b) the private company not having any
investment by another body corporate in its share capital.
This seems like a half-hearted attempt at righting a wrong. The
problem with the thresholds provided is that the section could not be
applicable at the time of issuing the loan but could be subsequently
applicable. The rationale for such fluid thresholds is not clear. The actual
amendment may provide some clarity. If an amendment is brought in lines of the
aforesaid thresholds of exemption, it will cause a lot of confusion in
implementation.
10) Related Party Transactions
The most dreaded provision of all in respect to operations of
private companies that are largely family run businesses is now done away with
in toto. The suggestions provide that Section 188 shall not apply to private
companies.
This is a welcome move and will be
largely applauded by stakeholders, corporate professionals and industry as a
whole. (In an older post, the issue of related party transactions as applicable
to private companies and the disclosures required to be obtained by private
companies to ensure compliance with Section 188 is available here.)
11) Appointment of managing
director, whole time director and manager
The requirement of taking Central Government approval where the
remuneration was in variance with Schedule V in case of managing directors,
whole-time directors and managers has sought to be done away with.
The move is in keeping with the provisions of the previous
Companies Act.
12) Appointment of key managerial
personnel
The restriction of a whole-time key managerial personnel holding
office in more than one company (except the subsidiary of such company) is now
sought to be made inapplicable to a private company. The Act also requires that
a KMP choose 1 of the 2 or more positions held by such KMP in any different
companies.
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This Article has been shared by CA Gaurav Mittal. He can be reached at mittalgaurav05@gmail.com
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