By Himanshu V. Kishnadwala Chartered Accountant
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Synopsis
The regime of the Companies Act, 1956 has come to an end, with the notification of a majority of the sections of the Companies Act, 2013 . Significant changes have been brought/new concepts have been introduced like withdrawal of several relaxations enjoyed by the private Companies with added compliance burden, introduction of new concepts like OPC (One Person Company), etc. The article discusses in detail the key changes notified/ proposed with respect to Private Limited Companies and will be of relevance to a large number of readers.
Background
The Companies Act, 2013 (‘New Act’) received the assent of the President on 29th August, 2013 and was notified in the Gazette on 30th August, 2013. Of the 470 sections in the New Act, 98 sections or part thereof have been brought into force from 12th September 2013. Further, the Government has clarified that the relevant provisions of the Companies Act, 1956 (‘existing Act’) which correspond to the provisions of those 98 sections of the New Act shall cease to have effect from the said date.
The New Act has made material changes to the provisions under the existing Act. In this article the various privileges and exemptions which are available to a private company under the existing Act and the status thereof, under the New Act are discussed. The said analysis is irrespective of the fact whether all the said provisions have been notified by the Central Government or not.
1. Definition of Private company:
Under the New Act a private company is defined u/s. 2(68) as under:
“private company” means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,-
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred: (emphasis supplied)
Provided that 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:
Provided further that:
(A) persons who are in the employment of the company; and
(B) 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; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company; (emphasis supplied)
The following changes in the definition of a private company may be noted:
a) Except in the case of One Person Company: maximum number of members, which a private company can have, is increased to 200 from the existing limit of 50;
b) Under the existing Act, a private company by its Articles is prohibited from inviting the public for subscription of shares and debentures. Under the New Act the prohibition applies to securities as defined u/s. 2(h) of the Securities Contracts (Regulation) Act, 1956 which includes not only the shares and debentures but also other securities prescribed therein;
c) Under the existing Act, in order to form a private company it is essential that its Articles contain a Clause that prohibits a company from accepting deposits from persons other than its members, directors or their relatives. The New Act does not prescribe a similar condition and thus, under the New Act, a private company can be formed without inserting in its Articles, a Clause prohibiting invitation or acceptance of deposits from persons other than its members, directors or their relatives. This however does not imply that a private company can invite or accept deposits from any person since the said restrictions are contained in section 73 (and draft Rules thereon) which deal with the provisions for acceptance of deposits.
2. Restriction on commencement of business:
As per the New Act, a private company cannot commence business or exercise borrowing powers:
• till every subscriber to the memorandum has paid the value of shares taken by him and the directors of the company have filed declaration to that effect; and
• the Company has filed with the Registrar a verification of its registered office.
Under the existing Act, a private company could commence business or exercise borrowing powers immediately on being formed/incorporated.
3. Share Capital:
a) Under the existing Act, a company is prohibited from issuing classes of shares other than equity or preference shares. Further, the Act provides that the shareholder’s voting rights should be in the same proportion to his share of the paid up equity capital of the company. However, these provisions do not apply to a private company which is not a subsidiary of a public company [section 90(2) of the existing Act]. Thus, under the existing Act, a private company not being a subsidiary of a public company is permitted to issue types of shares other than the equity share or the preference share. It can also issue shares with disproportionate rights in regard to dividend, participation in any surplus on liquidation and with disproportionate voting rights.
However under the New Act, similar exemption is not given to a private company.
b) Under the existing Act, a private company can issue further share capital to any person or in any manner as it thinks best in its own interest. Its Articles may or may not provide for pre-emptive rights of the shareholders.
Under the New Act, however, all companies including a private company, are required to offer shares to persons who, on the date of the offer, are holders of equity shares of the Company in proportion, as nearly as circumstances admit, to the paid up share capital on those shares. Thus the current practice in private companies of freely issuing shares to any outsider will be restricted.
4. Providing financial assistance for purchase of its own/holding company’ s shares:
Under the existing Act, a public company or a private company which is a subsidiary of a public company is prohibited from giving a loan, a guarantee, a security or any other kind of financial assistance to any person for the purpose of purchase of shares in the company or in its holding company.
Under the New Act, such prohibition is restricted to public company only. Accordingly, private companies, including those which are subsidiaries of a public company would be able to offer financial assistance to any person for purchase of shares in the company or in its holding company.
5. Appointment of Directors:
a) Where a person other than a retiring director stands for directorship:
U/s. 160 of the New Act, a person who is not a retiring director and desires to stand for directorship is required to give 14 days’ notice in writing and a deposit of Rs. 1 lakh or such higher amount as may be prescribed. The deposit amount would be refunded provided he gets elected or gets at least 25% vote. A private company is not excluded from the applicability of the said provisions.
U/s. 257 of the existing Act, such person was required to deposit a sum of Rs. 500 only. However, it seems that the existing provision was complied more in breach – the same may become more difficult to comply in view of the increase in the amount of deposit to Rs. 1 lakh.
b) Number of directorships:
U/s. 275 of the existing Act, a person cannot become a director in more than 15 companies. For the purpose, a person holding directorship in a private company which is neither a subsidiary nor a holding company of a public company is not considered.
U/s. 165 of the New Act the said limit is increased
to 20 but it further provides that in the
said limit of 20, the number of public companies
cannot exceed 10. Further it is clarified that for
reckoning the limit of public companies, directorship
in a private company which is either a
holding or a subsidiary of a public company is
to be included. Thus under the New Act, since
directorships in private companies will also
need to be considered, it will require several
persons to reduce their number of directorships
in private companies.
c) Appointment of
directors to be voted on individually:
U/s. 162 of the New Act where a company including
a private company, desires to appoint 2 or more persons
as directors by a single resolution, it is necessary
first to pass a resolution authorising their appointment
in that manner without even one dissentient
vote being cast against such resolution.
Under the existing Act, a private company which is
not a subsidiary of a public company is permitted to
appoint two or more persons as directors even by a
single resolution with no pre-conditions attached to it.
d) Consent to act
as a director:
U/s. 152 of the New Act where a person is proposed
to be appointed as a director by a company including
a private company, he is required to furnish a declaration
that he is not disqualified to become a director
under the Act. It is further provided that a person
appointed as a director shall not act as a director unless
he gives his consent to hold the office as director
and such consent has been filed with the Registrar.
Similar provisions under the existing Act were not
applicable to a private company (unless it is a subsidiary
of a public company).
6.
Appointment of Managerial Personnel:
a) As per section 269 of the existing Act, every
public company or a private company which
is a subsidiary of a public company, having a
paid up share capital of Rs. 5 crore, is required
to have a managing or whole time director or
manager.
As per section 203 of the New Act, every company
belonging to such class or classes of
companies, as may be prescribed by the Central
Government, is required to have the following
whole-time key managerial personnel:
• Managing director or Chief Executive Officer or
Manager or Whole-time director;
• Company secretary; and
• Chief financial officer.
Thus, if the specified class of companies includes
private companies above the specified threshold,
they will need to comply with the above.
b) Under the New Act, it is further specified that
a person who is the Managing director or Chief
Executive Officer cannot be appointed as the
Chairperson of the company unless Articles
of such company provide for the same or the
company carries on multiple businesses.
c) A whole-time key managerial personnel cannot
hold office in more than one company except
in its subsidiary company, though he can be a
director of any company with the permission
of the Board.
Under the existing Act a person can be appointed
as a managing director in two companies
and for the purpose, managing directorships in
a private company which is not a subsidiary of
public company is not considered;
d) As per section 196(3) of the New Act, which
applies to all types of companies, a person
cannot be appointed to the post of managerial
personnel who is below the age of 21 years or
has attained the age of 70 years.
Under the existing Act, no such age criteria
were prescribed in relation to a private company.
e) Under the existing Act, a private company (not
being a subsidiary of a public company) is not
prohibited from appointing a managing director
or a manager for a term which may exceed 5
years at a time.
Under the New Act, all types of companies, including
a private company, are prohibited from appointing
managing director or whole time director or manager
for a term exceeding 5 years at a time.
7.
Restrictions on Powers of Board:
As per the New Act, the Board of a company, including
of a private company can exercise the following
powers only with the consent of the company by a
special resolution:
a) Sale, lease or otherwise disposal of the whole
or substantially the whole undertaking. The
term ‘substantial’ means where not less than
20% of the value of the undertaking is being
disposed off;
b) To invest, otherwise in trust securities, the
amount of compensation received by it as a
result of any merger/amalgamation;
c) To borrow money, where the money to be
borrowed, together with the money already
borrowed exceed the aggregate of its paid
up share capital and free reserves;
d) To remit, or give time for the re-payment of,
any debt due from a director;
Under the existing Act, there were no such requirements
or restrictions on a private company which is
not a subsidiary of a public company.
8. Loan to
directors:
As per section 185 of the New Act no company,
including a private company, can advance any loan
to any of its directors or to any other persons in
whom the director is interested or give guarantee
or provide any security in connection with any loan
taken by him or such other person.
The corresponding provisions of section 295 of the
existing Act were not applicable to a private company
(unless it is a subsidiary of a public company).
Section 185 has also become operative since 12th
September, 2013. Hence, in case of any fresh loans
given or renewal of loans after that date, the provisions
of the section would need to be complied with.
9. Loans and investments by a company:
The New Act provides for the manner in which and
the limits up to which a company, including a private
company can give loan or give guarantee or provide
security in connection with a loan to any other body
corporate or person or acquire any securities of any
other body corporate. As per section 186 of the Act,
unless authorised by a special resolution passed at a
general meeting, such loans, investments,
etc.,
made
by any company cannot exceed 60% of its paid up
share capital, free reserves and securities premium account
or 100% of free reserves and securities premium
account, whichever is lower. It further provides that
the loan cannot be given at a rate of interest lower
than the prevailing yield of 1 year, 3 year, 5 year or
10 year Government security closest to the tenor of
the loan. It also empowers the Central government to
prescribe limits up to which the companies registered
u/s. 12 of the Securities and Exchange Board of India
Act, 1992 can take intercorporate loan or deposit.
Section 372A of the existing Act also restricts loans
and investments by the company. However, the
provisions under the New Act are more stringent and
restrictive. The material differences between the two
provisions are as under:
a) Section 372A is not applicable to a private
company not being a subsidiary of a public
company while section 186 applies to private
companies also;
b) New section not only covers inter-corporate
loans and investment but also to loans and
investment given to non-corporates;
c) As per section 372A, a loan cannot be made at
the rate of interest lower than the prevailing
bank rate made public u/s. 49 of the Reserve
Bank of India Act, 1934 – u/s. 186 of the New
Act, the rate of interest is linked to the prevailing
yield of Government securities;
d) Following transactions not covered (or exempted)
under the provisions of section 372A of the existing
Act gets covered u/s. 186 of the New Act:
• Investments in right issue of shares made in
pursuant of section 81(1)(a);
• Loan by a holding company to its wholly owned subsidiary;
• Guarantee given or security provided by a holding
company in respect of loan to its wholly
owned subsidiary;
• Acquisition of securities by a holding company
of its wholly owned subsidiary;
e) A new provision is inserted to prohibit investment
through more than 2 layers of investment
companies.
10. Interested director not to participate or vote in
Board’s proceedings:
As per section 184 of the New Act, every director
of a company, including of a private company, who
is concerned or interested in a contract or arrangement
entered into or proposed to be entered into
is required to disclose the nature of his concern or
interest at the meeting of the Board and he cannot
participate in proceedings of such meeting.
Similar provisions under the existing Act were not
applicable to a private company.
11. Administration related:
a) Time and Place of the Annual General Meeting:
Under the existing Act, a private company has the
option to fix the time for its annual general meeting
by its Articles or by a resolution passed in one
annual general meeting wherein time for holding
subsequent meeting is fixed/decided. In case of a
private company (unless it is a subsidiary of a public
company), it also has the option of fixing the place
of its annual general meeting in the like manner.
The New Act does not provide for similar options and
as provided in section 96(2), all companies, including
a private company, is required to hold its annual
general meeting between 9 a.m. and 6 p.m. on a day
that is not on a National holiday, at the registered
office of the company or at some other place within
the city, town or village in which the registered office
of the company is situated.
b) Meetings and Proceedings:
By virtue of the provisions of section 170 of the
existing Act, a private company by its Articles can
frame its own Rules as regards the length of notice
for calling meeting, contents and manner of service
of notice and person on whom it is to be served,
Explanatory statement to be annexed to notice,
Quorum for meeting, Chairman of meeting, Proxies
and manner of Voting on resolutions.
The New Act does not grant similar exemptions
hence, a private company is required to follow the
same rules and procedures as are applicable to a
public company.
c) Filing of the Financial Statements with the Registrar:
Proviso to section 220 of the existing Act permits a
private company to file copy of Statement of Profit
and Loss separately with the Registrar and the same
is not available to general public for inspection.
Under the New Act no such exemption is available
to a private company and all Financial Statements
filed u/s. 137 including the Statement of Profit and
Loss, would be available to the general public for
inspection.
d) Register of directors:
Under the existing Act, all companies, other than a
private company, which is not a subsidiary of a public
company are required to enter date of birth of a
director in the Register maintained. The exemption
granted to a private company has been withdrawn
under the New Act, and accordingly, the Register
maintained even by a private company shall contain
information about the date of birth of a director.
12. The following exemptions and privileges available
under the existing Act are also available under the
New Act:
(A) In the case of all types of private companies:
• Filing of statement in lieu of prospectus before
allotment of shares is not required;
• A private company need not have more than
2 directors;
(B) In the case of a private company not being
a subsidiary of a public company:
• The provisions relating to the managerial remuneration
like the extent and manner of payment, fixing of overall maximum remuneration,
limit of minimum managerial remuneration
in the event of no profits or inadequate
profits, etc., are not applicable and such company
can remunerate its managerial personnel
by such higher percentage of profits or in any
manner as it may think fit;
• The provisions relating to the appointment,
retirement, reappointment, etc., of directors
who are to retire by rotation and the procedure
relating thereto, are not applicable and
the company can frame its own Rules for the
purpose in the Articles;
• The provisions relating to the manner of filling
up casual vacancy among the directors are not
applicable and the company can frame its own
Rules for the purpose in the Articles;
• The company can by its Articles, provide for any
disqualification for appointment as a director
in addition to those specified in the Act;
• The company may provide any other ground
for the vacation of the office of a director in
addition to those specified in the Act;
13. One Person Company (OPC):
The concept of One Person Company has been introduced
under the New Act. Section 2(62) of the Act
defines the OPC to mean a company which has only
one person as a member and as per section 3, a company
formed by one person would be a private limited
company. Thus, the OPC would enjoy all the exemptions
and privileges enjoyed by any private company. In addition,
OPC enjoys following exemptions and privileges:
a) It is not mandatory for the OPC to prepare
the cash flow statement;
b) In the absence of company secretary, the Annual
Return filed u/s. 92 can be signed by the
director;
c) The OPC is not required to hold an Annual
general meeting;
d) The provisions of section 100 to 111 which
provides for matter regarding extraordinary
general meeting, the length of notice for
calling general meeting, contents and manner
of service of notice and person on whom it
is to be served, Explanatory statement to be
annexed to notice, Quorum for the meeting,
Chairman of the meeting, Proxies and manner
of Voting on resolutions, etc., do not apply to
the OPC;
e) The financial statement need not be signed
amongst others, by the Chief Financial Officer
and the Company secretary. It is sufficient
compliance if the same is signed by one director;
f) It is sufficient compliance if the OPC has only 1
director instead of minimum 2 required in the
case of a private limited company;
g) In case of the OPC it is sufficient if at least 1 meeting of the Board of
Directors is held in each half of a calendar year.
14. Conclusion
As seen above,
the New Act has brought in many changes in the existing Act and various new
concepts have also been introduced. To some extent, the Clauses in the Articles
of the existing private companies may not be in sync with the provisions of the
New Act. The Articles of the existing private companies are based on Table A of
the existing Act which corresponds to Table F of the New Act. It will be
advisable for all private companies to compare the existing Clauses in its
Articles with Table F of the New Act and making the necessary changes as
required.
In conclusion, it may be said that the Private Limited Company is one
of the most widely used legal forms by many businessmen in India. In fact, many
of the successful business group had begun their first venture by forming a
private company, the reason being it was relatively easy to form and lesser
regulations applicable. As seen above, a number of privileges enjoyed by the
private company under the existing Act have been withdrawn under the New Act.
Due to this, a lot of companies (especially family owned) would need to
expeditiously explore whether they can really cope with the new requirements or
that they need to change to some other form of entity like Limited Liability
Partnership (LLP).
