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EXEMPTIONS TO PRIVATE COMPANIES UNDER COMPANIES ACT 2013 IMPACT ANALYSIS

Corporate Laws / Banking / SEBI / LLP - By: - Bhavik Gala - Dated:- 19-1-2016 - INTRODUCTION Good rules are always essential to allow businesses to function with ease just as they are required to allow traffic to flow smoothly, but the challenge is to strike the right balance between regulation and relaxation. Regulators always strive to achieve a balance so that a reasonable level of oversight is achieved without excess cost of compliance. Section 462 of the Companies Act, 2013 ( the Act ) empo .....

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ublic companies on several counts of compliances. Finally, on the back of several representations by industry associations and keeping in line with the theme of Ease of Doing of Doing Business and Make in India Campaign, the Ministry of Corporate Affairs, Government of India had recently vide its Notifications from time to time provided relaxations to Private Limited Companies to reinstate the relaxed policy regime for private companies. Needless to say, the private company exempting notificatio .....

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tion of June 05, 2015 and also other notifications issued thereafter by the Ministry of Corporate Affairs granting relaxation. RELAXATIONS GRANTED TO PRIVATE COMPANIES 1. FILING OF BOARD RESOLUTIONS WAIVED FOR PRIVATE COMPANIES [CHAPTER VII - SECTION 117(3)(g) - REDUCTION OF COMPLIANCE BURDEN & RESTRICTION OF PUBLIC ACCESS TO PROCEEDINGS OF BOARD MEETINGS]: Section 117(3)(g) of the Act requires companies to file copies of Board Resolutions passed in connection with certain matters dealt with .....

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fying the business of the company approving amalgamation, merger or reconstruction taking over a company or acquiring a controlling or substantial stake in another company additional matters as prescribed under Rule 8 of Companies (Meetings of Board and its Powers) Rules, 2014 One of the major relaxations for private companies is exemption from complying with the requirements of Section 117(3)(g) of the Act i.e. filing certain Board resolutions under provisions of Section 179 (3) of the Act. Thi .....

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es Act, 1956 with regard to the filing of resolutions with the Registrar which have been passed by the Board. Only the Special Resolution and the specified resolutions / agreement were required to be filed with. 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 that sub-section, the resolution of the board will still be required and can not be passed through circulation. All that is exempted is that there will b .....

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in share capital of the Company; b. Borrowing from banks, Financial Institutions or Body corporate is less than twice of its paid up capital or ₹ 50 crore, whichever is lower; and c. such a private company should not have defaulted in repayment of borrowings as may be existing on the date of the transaction under the section. Section 67 is similar to Section 77 of the Companies Act, 1956 which had exempted private companies (which are not subsidiaries of public companies) from the provisio .....

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pital. Since both Section 100 of the 1956 Act and Section 68 of the Act contemplate consequent reduction in capital, the question remains whether the intent of Notification by exempting private companies from Section 67 also exempts it from the compliance of the provisions of section 68 of the Act, for buying its own shares!!! 3. KINDS OF SHARE CAPITAL AND VOTING RIGHTS [CHAPTER IV, SECTION 43 & 47 - EXEMPTION IF PROVIDED IN MEMORANDUM OR ARTICLES OF ASSOCIATION] Under the 1956 Act, private .....

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ulfil certain conditions to be eligible to issue equity shares with differential rights. This section is essentially in the same form as it was under the 1956 Act, the only difference being that the 1956 Act exempted private companies from the equivalent provision. Section 47 of the Act provides that the equity shareholders shall be entitled to vote on all resolutions, while preference shareholders are permitted to vote only on resolutions which would affect their rights or are in relation to wi .....

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mption was granted, there was difficulty in structuring instruments with such rights, which will now be possible. This exemption will also help in structuring returns and liquidation preference to foreign investors. 4. DEFINITION OF RELATED PARTY [CHAPTER I - SECTION 2(76)(VIII) IS NOT APPLICABLE WITH RESPECT TO SECTION 188 OF THE ACT] Certain related party transactions as specified in Section 188(1), require the approval of the Board of Directors at Board meeting, besides disclosure of certain .....

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now not applicable to a private company with respect to Section 188. Accordingly, a contract by a private company will not be regarded as a related party transaction if it is entered into by a private company with its holding company, subsidiary company, associate company or a fellow subsidiary company. Although holding, subsidiary, associate company and subsidiary of holding company are excluded from definition of related party , the Director (other than an independent Director), Key Manageria .....

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ith respect to disclosure requirements of related party transactions shall be applicable to a private company. 5. RELATED PARTY TRANSACTIONS: [CHAPTER XII - SECOND PROVISO TO SECTION 188(1)] With regard to related party transactions, second proviso to Section 188(1) which states that no member of the company shall vote on the ordinary resolution to approve any contract or arrangement which may be entered into by the company, if such member is a related party, has been exempted for private compan .....

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the contracts or arrangements by a private company with its other related parties like its directors, a firm in which its director is a partner, a private company in which its director is a member or director, will still require either consent of the Board or a resolution of the general body depending upon the threshold of the transaction. But members who are related parties will be allowed to vote on such resolutions. This is a big relief to the private companies as having disinterested members .....

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ith any loan that the directors avail in their personal capacity. The exemption has now been granted to private companies from compliance of provisions of Section 185 provided it complies with the following conditions: (a) There shall be no other body corporate shareholder in the lending company; (b) if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and (c) Such .....

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Section 185 being contingent on the condition that no corporate shall be a shareholder and debt - equity ratio shall not be more than 2:1 substantially restricts the applicability of the exemption. It also remains to be seen whether convertible debt on the books of the company will be seen as debt or equity. Section 185 of Companies Act, 2013 is parallel to Section 295 and 296 of Companies Act, 1956 and it is interesting to note that Private Companies were exempted from Section 295 and 296 of C .....

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e limited company may participate in the board meeting after disclosing his/ her interest. This relaxation however, is subject to the director providing disclosures of his interest in the prescribed form before he/ she participates in the meeting. Prior to this exemption, many private companies have found it difficult to comply with the provisions of Section 184(2), especially in a situation where there are only two directors and either one or both of them are interested. Absence of disintereste .....

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rd meeting of a private company after disclosure of his interest but he cannot be counted for the purpose of ascertaining quorum under section 174(3) since section 174(3) provides Directors who are not interested and present at the meeting shall be the quorum. Whereby, there can be a situation where a Board Meeting of a private company may not be held for want of quorum of disinterested directors although exemption has been given for an interested director to vote in a matter where he is interes .....

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t of the amount of compensation received by the company as a result of merger or amalgamation in trust securities; Borrowing money exceeding the aggregate of the company s paid-up share capital and free reserves; and Remittance or granting time for the repayment of, any debt due from a Director. Now, the provisions of Section 180 of the 2013 Act are not applicable to Private Company. The similar provisions of the section 293 of Companies Act, 1956 were not applicable to private companies. This e .....

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ISE] Sections 101 to 107 and Section 109 of the 2013 Act deal with the requirements of convening and conducting of general meetings by all companies, such as service of notice of general meeting, explanatory statement, quorum, chairperson of the meetings, appointment of proxies, restriction on voting rights, voting by show of hands and demand for poll. • Notice of General Meeting (Section 101) • Statement to be annexed to notice (Section 102) • Quorum for meeting (Section 103) &bu .....

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pect of conduct of its general meetings. This power was not available under the 2013 Act. The MCA Notification has restored this power and provided private companies with the flexibility to decide their own procedure for conducting general meetings by incorporating the provisions in their articles of association. 10. APPOINTMENT OF DIRECTORS [CHAPTER XI - SECTION 160 & SECTION 162 - NOT APPLICABLE] Section 160 deals with right of persons other than retiring directors to stand for directorshi .....

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bits companies from passing a single resolution for appointment of two or more directors unless such a motion has first been agreed to unanimously by all the shareholders. Now, private company is exempted from the applicability of Sections 162 of the 2013 Act. This exemption would ease compliance requirements for private companies in respect of appointment of directors. 11. NUMBER OF COMPANIES IN WHICH A PERSON CAN ACT AS AUDITOR [CHAPTER X, SECTION 141(3)(g) - SHALL APPLY WITH MODIFICATIONS] Se .....

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t to disqualification and liable to vacate office. Now, the words other than one person companies, dormant companies, small companies and private companies having paid up share capital of less than one hundred crores rupees have been inserted after the words twenty companies . It implies that while calculating the limit of twenty companies, the one person companies, dormant companies, small companies and the private companies with the paid up share capital of less than rupees 100 crores will be .....

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f section 73(2), a company is allowed to accept deposits from its members subject to certain conditions as prescribed under clause (a) to (f) of the said section. The said conditions are as below: a) Issuance of circular to the members containing required particulars / disclosures; b) Filing of circular with the Registrar of Companies; c) Opening of Deposit Repayment Reserve Account with scheduled bank and depositing the prescribed amount therein; d) Deposit insurance; e) Certificate regarding n .....

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made. Rule 3(3) of the Companies (Acceptance of Deposits) Rules, 2014 ( Deposit Rules ) provides that a company cannot accept or renew any deposits from its members, if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits exceeds 25% of the aggregate of the paid-up capital and free reserves of the company. Since the Deposit Rules have not been amended by the MCA Notification, there appears to be a conflict be .....

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eing given out of funds acquired by him by borrowing or accepting loan or deposits from others and that the company shall disclose money so accepted in the Board s Report. Although these aforesaid relaxations does not liberalize acceptance of deposits by private companies to the extent of the position under the 1956 Act, it eases the acceptance of deposits by private company as a large number of private companies are formed as closely held companies. In these types of entities, loans and advance .....

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company to dispatch the offer letter in respect of the rights issue through speed post or registered post or electronic mode to all the shareholders at least 3 days before the date of opening of the issue. Further, under Section 62(1)(b), the approval of the members of the company by way of a special resolution was required for the purpose of issuance of Employee Stock Option Schemes(ESOPs). The MCA Notification introduces a new proviso to Section 62(1)(a)(i), which provides that if at least 90 .....

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without the requirement of complying with a minimum offer period of 15 days and may close its offer for rights issue in less than 15 days period [the period may be reduced to less than 15 days but cannot be extended beyond 30 days]. Further, The notice for making the rights offer may be despatched in less than 3 days period before opening of the issue. Such exemption to private companies was also provided under Section 81(3)(a) of the Companies Act, 1956. The Notification remains ambiguous as to .....

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ons of Managing/Whole time Director/Managers, if the appointment is not approved by a company in general meeting. Now pursuant to MCA Notification, Section 196(4) and Section 196(5) are not applicable to private companies. Thus, in case of private companies the appointment or remuneration of the Managing Director, Whole time Director or the Manager does not require approval at the Board Meeting/General Meeting and subsequently the approval of Central Government is also not required, even if the .....

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ubsidiaries of public limited companies. 14. MINIMUM CAPITAL REQUIREMENT - CHAPTER I - SECTION 2(68) Another relief to private companies has been brought through the Companies (Amendment) Act, 2015, whereby for the ease of doing business in the country, the requirement of minimum paid- up share capital of rupees 1 lac for private companies has been dispensed with. However the MCA has reserved the right to specify the same by way of its rule making authority. As a result of the omission of the re .....

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