EXEMPTIONS AND PRIVILEGES APPLICABLE TO PRIVATE COMPANIES UNDER COMPANIES ACT, 2013

[Mr. M. GOVINDARAJAN]

Private Company

Private Company is one of the types of Companies enumerated under Companies Act, 2013 (‘Act’ for short).  Section 2(68) of the Act defines the expression ‘private company’ as a company having a minimum paid-up share capital as may be prescribed, and which by its articles,-

• restricts the right to transfer its shares;
• except in case of One Person Company, limits the number of its members to two hundred:

Where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member.  Persons who are in the employment of the company; and persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members;

• prohibits any invitation to the public to subscribe for any securities of the company.

Exemptions and privileges

The Act treated the private companies at par with the public companies and the private companies had to comply with all sorts of compliances as applicable to private companies.  On representations of the stakeholders, the Central Government, in the interest of public, directed that certain provisions of the Act shall not apply or shall apply with such exceptions, modifications and adaptations, as specified in Notification vide No. GSR 464 (E), dated 05.06.2015 to a private company as detailed below-

• Cash flow statement - Section 2(40) defines the expression ‘financial statement’.  The proviso to this section provides that the financial statement may not include the ‘Cash flow Statement’ to private company (if such private company is a startup company).
• Related party - Section 2(76) defines the expression ‘related party’.  Section 188 of the Act provides that no company shall enter into any contract or agreement with the related party in certain transactions.  The private company is exempted from the provisions of Section 2(76) and section 188.
• Section 43 and section 47 - Section 43 provides the kinds of share capital and section 47 provides for the voting rights of various types of share holders.  These two provisions shall not be applicable to private companies where memorandum or articles of association of the private company so provides.
• Section 62(1)(a)(i) and section 62(2) - Further issue of share capital - Restrictions envisaged under Section 62(1)(a)(i) and 62(2) will apply to private companies with the insertion of a new proviso which provides that notwithstanding anything contained in Section 62(2) in this section, in case 90% 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.

Section 62(1)(b)  provides that the share shall be offered to employees under a scheme of employees' stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed.  For a private company ordinary solution is enough.

• Section 67 - Restrictions on purchase by company or giving of loans by it for purchase of its shares - Section 67 shall not apply to private companies-

• in whose share capital no other  body  corporate  has invested any money;
• if the borrowings of such a company  from banks or financial institutions or anybody corporate is less than twice  its  paid  up  share capital or Rs.50 crores, whichever is lower; and
• such a company is not in  default   in   repayment   of  such borrowings subsisting at   the   time   of   making transactions under   section 67.

• Section 73 - Prohibition on deposits from public - Section 73(2) provides that a company may, subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from its members on such terms and conditions, including the provision of security, if any, or for the repayment of such deposits with interest, as may be agreed upon between the company and its members, subject to the fulfillment of the conditions prescribed.

The above shall not be applicable to private companies-

• which accepts from its members monies not exceeding 100% of aggregate of the paid up share capital, free reserves and securities premium account; or
• which is a start-up, for 5 years from the date of its incorporation; or
• which fulfils all of the following conditions, namely:-

•  which is not an associate or a subsidiary company of any other company;
• if the borrowings of such a company from banks or financial institutions or anybody corporate is less than twice of its paid up share capital or Rs.50 crores, whichever is lower; and
• such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section.

The company referred to above shall file the details of monies accepted to the Registrar in such manner as may be specified.

• Section 92 - Annual Report - Section 92(1) provides that every company shall prepare a annual return in the prescribed form containing the particulars as they stood on the close of the financial year.  This section shall be applicable to private companies which are small companies where aggregate amount of remuneration drawn by directors.
• Proviso to Section 92 (1)  - Signing of Annual Report - The proviso to Section 92(1) provides that in relation to One Person Company and small company, the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.  This proviso shall be substituted by a new proviso for private companies.  According to this newly substituted proviso in relation to One Person Company, small company and private company (if such private company is a start-up), the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.
• Sections 101 to 107 and 109 -

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

These provisions shall apply to private companies unless otherwise specified in the sections or the Articles of the Company provide otherwise.

• Section 117(3)(g) - Resolutions and agreements to be filed - A private company shall not be liable to file resolutions passed by the Board of Directors in a meeting in pursuance of section 179(3).
• Section 141(3)(g) - Persons not eligible for appointment as an  Auditor of a company - Provision regarding 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 reappointment holding appointment as auditor of more than 20 companies shall apply to a private company other than one person companies, dormant companies, small companies and private companies having share capital less than Rs.100 crores.
• Section 143(3)(i) - Auditor’s Report - Section 143(3)(i) provides that the Auditor’s Report shall also state whether the company has adequate internal financial controls with reference to financial statements] in place and the operating effectiveness of such controls.  This section shall not apply to a private company -

• which is a one person company or a small company; or
•  which has turnover less than Rs.50 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or anybody corporate at any point of time during the financial year less than Rs.25 crores.

• Section 149(4) - Appointment of Independent Directors - Provisions of Section 149 (4) relating to appointment of one third of the total number of directors as independent directors only apply to listed company.
• Section 160 - Right of persons other than retiring director to stand for directorship - Private companies are exempted from complying with these provisions.
• Section 162 - Appointment of Directors to be voted individually - Private companies are exempted from complying with these provisions.
• Section 164 (3) - Disqualification for appointment of Director - A private company may, by Articles, provide for any disqualifications for appointment as a director in addition to those specified in Section 164 (1) and (2).
• Section 167(4) - Vacation of a Director - A Private company may, by its Articles provide any other ground for the vacation of the office of a director in addition to those specified in Section 167 (1).
• Section 173 (5) - Compliance - For the purpose of private company section 173(5) is substituted for a new provision.  The newly substituted section 173(5) provides that A One Person Company, small company, dormant company and a private company (if such private company is a start-up) shall be deemed to have complied with the provisions of this section if at least one meeting of the Board of Directors has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days.  Nothing contained in this sub-section and in section 174 shall apply to One Person Company in which there is only one director on its Board of Directors.
• Section 174 (3) - Quorum for meetings of Board - Section 174 (3) provides that where at any time the number of interested directors exceeds or is equal to two-thirds of the total strength of the Board of Directors, the number of directors who are not interested directors and present at the meeting, being not less than two, shall be the quorum during such time.  This shall apply with the exception that the interested director may also be counted towards quorum in such meeting after disclosure of his interest pursuant to section 184.
• Section 177 - Audit Committee - The private companies need not constitute an Audit Committee.
• Section 180 - Restrictions on Powers of Board - The Private Companies are exempted from the provisions of this section.
• Section 184 (2) - Disclosure of interest by Director - This section shall apply to private companies with the exception that the interested director may participate in such meeting after disclosure   of   his interest.
• Section 185 - Loan to Directors - This section shall not apply to a private company-

• in whose share capital no other  body  corporate  has invested any money;
• if  the borrowings  of such a company from banks or  financial  institutions or anybody corporate is less than  twice  of its  paid  up share capital or Rs.50 crores, whichever is lower; and
• such a company has no default   in   repayment   of such borrowings subsisting at   the   time   of   making  transactions under   this section.

• Section 188(1)  second proviso - Related Party Transactions - The second proviso of Section 188 (1) providing that no member of the company shall vote on the special resolution, to approve any contract or arrangement which may be entered into by the company if such members is a related party to private companies.
• Section 196 (4) and (5) - Appointment of Managing Director, Whole Time Director or Manager- the provisions relating to the appointment of these managerial personnel through a Board meeting and then a General Meeting and in cases with the Central Government’s approval shall not apply to private companies