Private Company – Exemptions

The Ministry of Corporate Affairs has notified yesterday exemptions for private companies, nidhi companies, government companies and Section 8 companies. The much awaited relief for private companies, we would say is almost here – as the notification issued is yet to published in Gazette of India.

The following are some of the key changes that are purported:

Related Party Transactions

Exemptions from related party transactions – the inclusion of subsidiary / holding company within the purview of related party transactions does not apply to Section 188 for a private company. Also the prohibition that no member of the Company shall vote on a special resolution to approve a related party transaction falling under Section 188 (1) has been removed for a private company. This is a major operational and compliance breather provided to private companies. However, it is to be noted that the draft notification on exemption to private companies sought to do away entirely the application of Section 188 to private companies. Our previous blog post on this can be found here.

Prohibition on Loan to Directors

The draconian provisions of Section 185 of the Companies Act have been made wholly inapplicable to a private company that does not have body corporate shareholders and borrowings of such private company is less than 2 times its paid up share capital or INR 50 crores, whichever is lower and the private company has not defaulted in repayment of borrowings.

This would offer a great respite to the smaller companies that have limited operations but a large number of private companies would not be able to avail the benefits of this exemption.

Share Capital

Where the articles of a private company so provide the application of Section 43 dealing with kinds of share capital and Section 47 dealing with voting rights would not apply. This opens up private companies to freely structure shareholding and create multiple / mezzanine structures in terms of shareholding etc.

Further Issues and ESOP

• The time period for issuance for further shares i.e. a rights issue may be reduced by 90% of the shareholders approving the same through electronic mode.
• Private companies may pass an ordinary resolution for issuance of ESOP instead of special resolution as contained in Section 62(1)(b).

Purchase of Securities

Section 67 prohibits any company from buying its own shares unless such company effects a reduction of capital under the provisions of the Companies Act. The notification exempts a private company meeting with the following criteria from complying with the following provision:

• Private company does not have body corporate shareholders;
• Borrowings of such private company is less than 2 times its paid up share capital or INR 50 crores, whichever is lower;
• The private company has not defaulted in repayment of borrowings.

The implications of such a sweeping exemption is to be seen.

Compliance with deposit regulations

A private company need not comply with the procedural requirements of issuance of circular and making deposits etc with a scheduled as mandated under Section 73 (2) if it is a private company (which accepts deposits from members of amount not exceeding 100% of aggregate of paid up share capital and free reserves). However, mandatory disclosure and filing obligations have been prescribed.

Management and Administration Provisions

The articles of a private company may provide that the following provisions shall not apply to private companies or make provisions that are different from the following:

• Section 101 – Notice of meeting
• Section 102 – Statement to be annexed to notice
• Section 103 – Quorum of shareholders meeting
• Section 104 – Chairman of meetings
• Section 105 – Proxies
• Section 106 – Restrictions on voting rights
• Section 107 – Voting by show of hands
• Section 109 – Demand for poll.

Similarly, Section 160 and Section 162 pertaining to retirement by rotation and appointment of directors have been made inapplicable to private companies.

Interested directors may participate in meetings of the board after disclosure of their interest.

Filing of Board Resolutions

Until now even private companies had to mandatorily file board resolutions where matters that can only be transacted at a board meeting are prescribed (Section 179(3)). The notification now exempts private companies from doing so.

Requirement of Special Resolutions

The requirement of a special resolution for selling or disposing of an undertaking, borrowing in excess of paid up capital and free reserves, investment in trust securities and remission or giving time for repayment of a loan by a director can be made by the Board.

Remuneration

The provisions of Section 196(4) (and consequently Section 196(5)) that requires approval of members and Central Government where the remuneration of a managing director is not as per the prescribed limits in Schedule V have been made inapplicable for a private company.

Few preliminary thoughts

The MCA has in keeping with the previous proposal offered operational and compliance relief to private companies in connection with day-to-day running of business. There has been some relief provided to private companies in compliance with requirements for related party transactions as well as the dreaded provision prohibiting providing loans to directors. Most of the changes have reverted the status of the private company and compliance requirements to that of the 1956 Act.

The proposals for exemptions to private companies had come in last June. In the meantime most companies have updated their articles and set in place procedures for implementation of the new Companies Act. The timing of the exemption is such that many companies would have to reanalyse and re-craft all rights of their stakeholders.

Private companies will also get the freedom today to structure further investments owing to the exemptions provided in relation to share capital and voting rights etc.

Having said that, this is a big boon for business and is a welcome move even if the move is quite late in the day.