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Exemptions to Private Companies

July 3, 2017     by Mayank Verma

Since the day Companies Act, 2013 was majorly notified, i.e. 01st April, 2014, it was widely criticised for being not business friendly and for being too restrictive. With the present Government’s resolve towards ease of doing business in India, several measures have been taken since then to ease the stringent provisions of Companies Act, 2013. The highlight of the journey since 01-April-2014 has been simplification in the process of Company Incorporation, integration of PAN and TAN (mandatory Income Tax registration numbers) into Company incorporation process (now the Company won’t have to make separate applications for these registrations thereby saving a minimum of 15 days process post incorporation. PAN is mandatory for Bank account opening), establishing National Company Law Tribunal (all matters under Companies Act are now being tried before this Tribunal in a time bound manner), notifying Insolvency and Bankruptcy code, 2016 thereby enabling the ease of closure of a Company in a time bound manner.

 

Several Notifications have been issued by the Ministry of Corporate Affairs, especially with respect to Private Limited Company, Small Companies and Start-up Companies. One major notification was issued on June 5, 2015 and now, another notification has been issued on June 13, 2017, further easing the compliances for these companies.

 

Given below is a brief analysis of the all exemptions that have been provided by the said notification:

 

S. No. Exemption / Modification / Adaptation from the Provisions of Companies Act, 2013 Analysis Possible Course of Action with regards to Article of Association of the Company
1. In section 2(40), for the proviso, the following shall be substituted:

Provided that the financial statement, with respect to one person company, small company, dormant company and private company (if such private company is a start-up) may not include the cash flow statement.

This means that a one person company, small company, dormant company and private company (if such private company is a start-up) need not include cash flow statement in its financial statement. If the AOA provides otherwise, then the company needs to amend its AOA to avail this exemption.
2. Section 2(76)(viii) shall not apply w.r.t. Section 188 Transactions with a holding company, subsidiary or an associate company or a fellow subsidiary shall not be considered as Related Party Transactions (RPT).
3. Section 43 and 47 shall not apply where MoA or AoA of the company provides otherwise Accordingly, private companies, by way of providing relevant provisions in their charter documents, are now free to structure voting rights (including voting rights to preference shares in case of non-payment of dividend), coupon on preference shares, etc. Company has to alter AOA for availing this exemption
4. Under Section Section 62(1)(a)(i) and 62(2):

Following proviso will be inserted in sub-clause (i) of clause (a) of sub-section (1) of Section 62:

“Provided that notwithstanding anything and sub-section (2) of 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.”

This would basically mean that in case of a rights issue, if at least 90% of the shareholders of the company agree (either in writing or in the form of an e-mail response) then the period of notice as well as the duration of rights offer can be shortened. If the AOA provides otherwise, then the company needs to amend its AOA to avail this exemption.
5. In Section 62(1)(b), for the words ‘special resolution’, the words ‘ordinary resolution’ shall be substituted This would mean that for the purpose of approving employee stock option plans, a private company would require an ordinary resolution and not a special resolution. If SR is mention in AOA then it has to be amended in order to avail this benefit.
6. Section 67 Will not apply to private companies:

  1. in whose share capital no other body corporate has invested any money;
  2. if the borrowings of such a company from banks / financial institutions / any Body Corporate is less than twice its paid up capital or Rs. 50 crs whichever is lower; and
  3. such a company is not in default in repayment of such borrowings subsisting at the time of making transactions under this section.
A private limited company can buy its own shares without effecting a consequent reduction of share capital if the company complies with the prescribed qualifications. If the AOA provides otherwise, then the company needs to amend its AOA to avail this exemption.
7. Section 73(2)(a) to (e) shall not apply to a private company which accepts from its members monies not exceeding 100% of aggregate of the paid up share capital and free reserves and securities premium account

OR

which fulfils all of the following conditions, namely:-

  1. which is not an associate or a subsidiary company of any other company;
  2. 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
  3. such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section.

Such company shall file the details of monies so accepted to the RoC in such manner as may be specified.

This means that private companies which accepts prescribed threshold of monies from its members will not require to issue circular to its members, file a copy of the circular to the RoC, deposit certain amount of money in its deposit repayment reserve account, provide a deposit instance and certify that no default has been committed in repayment of deposits and interest thereon. If the AOA provides otherwise, then the company needs to amend its AOA to avail this exemption.
8. Section – 92 (1)(g) shall apply to small companies  in the following way:

“aggregate amount of remuneration drawn by directors”

Small Company will only disclose the aggregate amount of remuneration drawn by all directors. No need to bifurcate the amount.
9. Section – 92 (1) shall apply to small companies in the following way:

“The annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.”

Now Annual Return can be signed by Company Secretary (if any) or any one director of the Company. Earlier it has to signed by atleast two directors. If the AOA provides otherwise, then the company needs to amend its AOA to avail this exemption.
10. Provisions of the Following Sections:

101 – Notice of General Meeting

102 – Explanatory Statements

103 – Quorum of General Meeting

104 – Chairman of the General Meeting

105 – Proxies

106 – Restrictions on Voting Rights

107- Voting by show of hands

109 – Demand for poll

Shall apply unless otherwise specified in respective sections of the articles of the company provide otherwise.

A private company can provide separate provisions in its articles with respect to its general meeting notice, explanatory statement, quorum, chairman, proxies, voting (by show of hands or by way of poll) and most importantly it can also specify voting rights in case of partly paid up shares. Articles of Associations are to be amended for availing these exemptions
11. Section 117(3)(g) shall not apply The provisions of Section 117 shall not apply to the resolutions passed by private limited company in pursuance to the provisions of clause 179(3). No MGT- 14 shall be filed by the Company for the above Board Resolutions passed. No Amendment is required under AOA of the Company.
12. Section -143(3)(i) shall not apply to the following private companies:

  1. which is a one person company or a small company; or
  2. which has turnover less than rupees fifty crores as per latest audited financial statement or which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than rupees twenty five crore.
The clause i of Section 143(3) focus about the requirement of having adequate Internal Financial Control System & its operating effectiveness in the Company and Disclosure of the same in Auditors Report. Now the OPCs, Small Companies and Specified Private Companies are not obligated to maintain these control systems in their respective Company.
13. Section 160 shall not apply In case of regularization of additional directors and appointment of any director other than retiring director, that the requirement of Rs. 1 lakh deposit and the 14 days’ notice period is no more required. If the AOA provides otherwise, then the company needs to amend its AOA to avail this exemption.
14. Section 162 shall not apply A private company can move the motion to appoint two or more persons as directors by a single resolution.
15. Section 173(5) shall apply in the following way:

A small company 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

The minimum number of board meetings to be conducted in every year has been atleast one in each half of a calendar year and min gap between two meetings is 90 days. Alteration of AOA is required.
16. Section 174(3) 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 This means that if the number of Interested Directors exceeds or is equal to two-thirds of the total strength of the Board of Directors, the Interested Director may also be counted towards quorum in such meeting after disclosure of his interest pursuant to Section 184.
17. Section 180 shall not apply This means that all the powers / decisions listed u/s 180 can now be taken by the board of a private limited company without obtaining approval from the shareholders of the company. AOA has to be altered if required.
18. Section 184(2) shall apply with the exception that the interested director may participate and will also be counted for quorum in such meeting after disclosure of his interest. This means that a director can participate in a meeting wherein such matters are discussed in which he / she is interested, only after he/she discloses his/her interest.
19. Section 185 shall not apply to a private company:

  1. in whose share capital no other body corporate has invested any money;
  2. if the borrowings of such a company from banks / financial institutions / any body corporate is less than twice of its paid up share capital or Rs. 50 crores, whichever is lower; and
  3. such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section.
Only prescribed type of companies are eligible for an exemption from the provisions of Section 185 and can advance, directly or indirectly, any loan (including any loan represented by book debt) or give any guarantee or provide any security in connection with a loan taken by a director or any other person in whom the director is interested. If the AOA provides otherwise, then the company needs to amend its AOA to avail this exemption.
20. Second proviso to Section 188(1) shall not apply In private company, even a related party member can also vote on resolutions, to approve any contract or arrangement with the related party.
21. Section 196(4) and (5) shall not apply The applicability of remuneration related provisions / restrictions in case of managerial personnel of private limited companies, especially in case of companies having losses or inadequate profits. Furthermore, no disclosures in the board or general meeting agenda will be required in case of remuneration of managerial personnel of private limited companies and such companies are also not required to file return with the RoC in this regard.

 

The Link to the following topics is given hereunder:

 

  1. MCA Notification dated June 05, 2015 : http://www.mca.gov.in/Ministry/pdf/Exemptions_to_private_companies_05062015.pdf
  2. MCA Notification dated June 13, 2017 : http://www.mca.gov.in/Ministry/pdf/ExemptionPrivateCompanies.pdf
  3. More Info on Start-Up Companies        : https://www.bsamrishindia.com/start-up-india-important-benefits-and-some-concerns/

 

 

 

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