♥ Background:
This article provides a synopsis of
all the exceptions, modifications and adaptations made in “the Act” for the
Private Companies.
AN attempt is made to highlight the
venues that can be freely transacted by private companies.
♥ Related Party Transactions:
Section 2(76) speaks about the definition of “related
party”, whereas Section 188 requires that all the specified transactions
with related parties that are not in ordinary course of business and which are
not at arm’s length price would require approval from the Board of the Company.
After the modifications from the
MCA, section 2(76) (viii) shall not apply with respect to Section 188.
Hence the following clauses are outside the purview of related party
transactions under section 188:
“i) Any company which is a holding,
subsidiary or an associates company of such company, or
ii) Any company which is subsidiary
of a holding company to which it is also a subsidiary company”.
Further, the second proviso to
section 188 (1) states 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 second
proviso to the section 188 (1) will not apply to private companies.
THE CRUX
From the above modifications, it is
been observed that though relaxations has been given to the holding, subsidiary
or associates as per section 2(76) (viii) for any Related Party Transaction
(RPT), the other clauses of 2(76) still stand to be attracted for having a
common directors, KMP, etc. in the Company, which may be an usual compliances
of section 188 regardless of this modifications..
♥ Further Issue of shares
Section 62 (1) deals with Further Issue of Shares.
Section 62 (1) (a) provides for the time limit in which the offer should made
that is to say “not less than fifteen days and not exceeding thirty days
from the date of offer”.
Besides offer, it also states that
if offer is not accepted within the specified time limit it would be deemed to
have been declined. To provide ease of doing such transitions for private
companies, MCA has inserted a proviso to the Section 62(1) (a) (i) which
read as follows:
“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”.
After the above modifications, a
private company can reduce a time limit specified for rights issue lesser than
the period specified in section 62 (1) (a) and section 62 (2) by getting
consent of 90 % of the members either in writing or in electronic mode.
Further, Section 62 (1) (b) which
deals with the issue of further shares to the employees under a scheme of
employees’ stock option subject to the requirement of passing a “special
resolution” by the company.
The MCA has now modified the section
62 (1) (b) which provides that the private companies can issue such class of
share by passing an “ordinary resolution”
♥ Appointment as Auditor
Section 141 (3) (g) states that a person who is in full
time employment elsewhere or a person or a partner of a firm holding
appointment as its auditor, if such persons or partner is at the date of such
appointment or re-appointment holding appointment as auditor of more than 20
companies shall be disqualified from being appointed as an auditor of the
company in which he is going to be appointed.
The MCA has now modified the said
sub clause by inserting the following modifications which is read as follows:
“Other than one person companies,
dormant companies, small companies and private companies having paid-up share
capital less than one hundred Crores rupees”.
From the above, the following
companies shall be excluded for calculating the limit of 20 companies for the
disqualifications of auditors in the private companies:
1. One Person Companies,
2. Dormant Companies,
3. Small Companies, and
4. Private Companies having paid-up
Share Capital is less than 100
Crores rupees.
♥ Administration of General Meeting
The articles of the private company
can have specific provisions regarding following sections:
Section 101 – Notice of the Company
Section 102 – Statement to be
annexed to notice
Section 103 – Quorum for Meetings
Section 104 – Chairman of Meetings
Section 105 – Proxies
Section 106 – Restrictions on Voting
Rights
Section 107 – Voting by Show of
Hands
Section 108 – Voting through
electronic means
Section 109 – Demand for Poll
The above sections shall apply to a
Private Companies unless otherwise specified in respective sections or
the articles of the private company provide otherwise. Hence the specific
clause of Articles in such case will prevail over these sections or in other
terms it will over ride these sections.
From the above, it is clear that the
Private Companies can now have a substantial relaxation in the administration
of the general meetings.
♥ Disclosure of Interest by Director
Section 184 speaks about the disclosure of
interest by the Director. Section 184 (2) states that an interested director to
a contract or arrangement or proposed contract or arrangement in which he is
concerned or interested, should not participate in the Board Meeting where such
contract are entered in.
The MCA has now made an exception to
the above sub section for private companies by allowing “interested
director may participate in such meeting after giving disclosure of interest”.
THE CRUX
From the above exceptions, it is
quite clear that an interested director of private Companies may participate in
such meeting, but he may not be counted as member of the meeting according to
the section 174 (3) for the purpose of Quorum which states that “ Where
at any time the number of interested directors exceeds or is equal to 2/3rd
of the total strength of the Board, the numbers of directors who are not
interested directors and present at the meeting, being not less than 2, shall
be the Quorum during such time”.
The Crux clears that, even though
relaxation has been given, the interpretation of the law if cannot be mistaken,
will be read in such a way that which might give arise to the difficulties for
corporates to pass on resolution where there are interested directors. Thus,
while the law is getting settled, MCA should come up with clarification on this
behalf to prevent the hardships which may be faced in near future.
THE CRUX
From the above exceptions, it is
quite clear that an interested director of private Companies may participate in
such meeting, but he may not be counted as member of the meeting according to
the section 174 (3) for the purpose of Quorum which states that “ Where
at any time the number of interested directors exceeds or is equal to 2/3rd
of the total strength of the Board, the numbers of directors who are not
interested directors and present at the meeting, being not less than 2, shall
be the Quorum during such time”.
Loans to Directors
According to Section 185 (1) no
company shall provide or advance any loan to the director or to any other
person in whom the director is interested.
The MCA with an exceptions, has made
the Private Companies outside the purview of this Section, provided that –
a) No other body corporate has
invested in its share capital;
b) Which have the borrowing from
banks or financial institutions or any body corporate is less than the twice of
their paid up share capital or 50 Crores Rupees, whichever is lower and;
c) Such a company has not defaulted
in repayment of such borrowings subsisting at the time of making transactions
under this section.
Now a private company fulfilling the
above conditions can provide or advance loans to any of its directors or any
other person in whom the director is interested.
♥ Resolutions and Agreements
Section 117 relates to resolutions or any
agreements to be filed with the ROC. Section 117 (3) (g) states that
resolutions passed in pursuance of sub-section (3) of section 179, Powers of
the Board should follow the requirement of the section 117. In other words any
resolution passed under section 179 (3) need to be filed with the ROC with the
time specified in that section.
With the MCA notification for
exceptions to private companies, the resolution passed by the private companies
covered in section 179 (3) will no longer be required to file with ROC are as
follows:
a) to make
calls on shareholders in respect of money unpaid on their shares;
b) to
authorise buy-back of securities under section 68;
c) to
issue securities, including debentures, whether in or outside India;
d) to borrow
monies;
e) to invest
the funds of the company;
f) to
grant loans or give guarantee or provide security in respect of loans;
g) to
approve financial statement and the Board’s report;
h) to
diversify the business of the company;
i)
to approve amalgamation, merger or reconstruction;
j)
to take over a company or acquire a controlling or substantial stake in another
company;
k) any other
matter which may be prescribed*.
* Matters that are prescribed
For any other matter which may be
prescribed. These matters are prescribed in the rules after amendment:
Companies (Meetings of Board and its
Powers) Rules, 2014
In addition to the powers specified
under sub-section (3) of section 179 of the Act, the following powers shall
also be exercised by the Board of Directors only by means of resolutions passed
at meetings of the Board.-
(a) to make political contributions;
(b) to appoint or remove key
managerial personnel (KMP);
(c) to appoint internal auditors and
secretarial auditor.
♥ Restriction on Powers of Board
Section 180 states that the Board may exercise
certain powers only with the consent of company by a special resolution.
The MCA now made an exception to
these powers for the private companies. In other words, private companies can
without the consent of the company by a special resolution exercise the
following powers:
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 director.
♥ Other Exceptions for Private
Companies
Section 43 deals with “Kinds of Share
Capital” and
Section 47 deals with “Voting Rights”.
The above two sections shall not
apply to the private companies, were the memorandum or articles of associations
of the company so provides.
So from the above, it is clear that
the private companies can now have flexibility in their share capital and can
even have share with differential voting rights.
Section 67 speaks about “Restrictions on
Purchase By Company or giving of Loans by it for Purchase of its Shares”. The
sections provides that “No company limited by shares or by guarantee and
having a share capital shall have power to buy its own shares unless the
consequent reduction of share capital is effected under the provisions of this
Act”
The MCA with an exceptions, has made
the Private Companies outside the purview of this Section, provided that –
a) No other body corporate has
invested in its share capital;
b) Which have the borrowings from
the banks or financial institutions or anybody corporate is less than the twice
of their paid up share capital or 50 Crores Rupees, whichever is lower and;
c) Such a company has not defaulted
in repayment of such borrowings subsisting at the time of making transactions
under this section.
If the private company fulfils the
above requirements then section 67 shall not apply to the private companies. In
other words now a private company can buy back its own shares.
Section 73 deals with the prohibition on
acceptance of deposits from public. Whereas, Section 73 (2) states that a
company may accept the deposits after fulfilling the following conditions:
a) Issuance
of circular to its members,
b)
Filing a copy of circular with ROC with in thirty days before the date of
issue of circular,
c)
Deposits not less than a 15% of the amount in the separate bank account,
d) Provide
deposit insurance,
e) Certify
that the company has not made any default in repayment of its deposits,
f)
Providing security if any for the due repayment for the amount of deposits.
With the MCA modifications for the
exceptions to the private companies, the above listed conditions shall not
apply to a private:-
“Companies which accept from
its members monies not exceeding 100% of aggregate of the paid up share capital
and free reserves, and such company shall file the details of monies so
accepted to the Registrar in such manner as may be specified”.
Section 160 speaks about right of persons other
than retiring director to stand for directorship. With the MCA notification the
said section shall not apply in relation to the private companies.
Section 162 says that appointment of directors
to be voted individually. With the MCA notification the said provision shall not
apply to the private companies. Thus, any private companies can now move a
motion at its general meeting for appointment of two more persons as director
of the company in a single resolution.
a) Issuance
of circular to its members,
b)
Filing a copy of circular with ROC with in thirty days before the date of
issue of circular,
c)
Deposits not less than a 15% of the amount in the separate bank account,
d) Provide
deposit insurance,
e) Certify
that the company has not made any default in repayment of its deposits,
f)
Providing security if any for the due repayment for the amount of deposits.
♥ The Way Forward…
The above relaxations provided to
the Private Companies are not the complete cure but can prove to be great
relief. The regulators have been liberal in the areas of deposits, eligibility
of auditors, ESOPs, etc., but were not able to meet the expectations of the
corporates in the areas of RPT, Loan to Directors, etc., to make them totally
exempt from the bucket. Private companies may be required to amend clauses of
the MoA/AoA in order to avail certain exemptions given by the regulators.
Nevertheless, the Corporates should
welcome these steps initiated by the MCA in providing the these relaxations,
which can now make a Private Companies to actually feel a comfort of
satisfaction in the Chambers of the Companies Act, 2013.
On a positive note, let’s hope for
some more initiation like this from the MCA in the near future.
- See more at: http://taxguru.in/company-law/exemptions-private-companies-candle-dark-room.html#sthash.Z72hmJzF.dpuf
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