1. Impact of Recent Exemptions to Private Companies BY P.K.MITTAL B. Com, LLB, FCS ADVOCATE DELHI HIGH COURT PAST CENTRAL COUNCIL MEMBER – THE INSTITUTE OF COMPANY SECRETARIES OF INDIA. CHIEF ADVISOR : PKMG LAW CHAMBERS Mobile 9811044365,9911044365 011-22540549,

2. EXEMPTION NOTIFICATION In exercise of its powers u/s 462(1)(a), 462(1)(b) and in pursuance of section 462(2) the Central Government vide notification dated 5 th June, 2015 has granted certain exemptions to private companies from the applicability of certain provisions of the Companies Act, 2013. It is intended to bring ease in doing business and to provide a simpler and easier legal frame work for the Private Companies to function.

3. The notification takes effect on and from 5 th June,2015. The exemptions, exceptions, modifications and adaptations granted under the notification are prospective in nature. A statute which affects substantive rights is presumed to be prospective in operation unless made retrospective either expressly or by necessary amendment. SHYAM SUNDAR Vs. RAM KUMAR, MANU/SC/0405/2001.

4. Any transaction entered into by a private company prior to the date of enforcement of the notification will not be covered by the reliefs granted under the notification. Section 6 of General Clauses Act, DEVI MULTIPLEX Vs. STATE OF GUJARAT, MANU/SC/0607/2015. VARDHAMAN PUBLISHERS Vs. MATHRABHUMI PRINTING PUBLISHING CO. LTD., MANU/KE/0096/1990. The private companies, while complying with the specified exceptions, modifications and adaptations shall ensure that the interests of their shareholders are protected.

5. The notification applies to private companies as defined u/s 2(68) of the Companies Act, 2013. As per Section 2(68) : “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 (iii) prohibits any invitation to the public to subscribe for any securities of the company. *the figure of minimum paid up capital of rupees one lakh has been deleted vide Companies Amendment Act,2015.

6. The notification does not apply to a private company which is a subsidiary of a public company as such a company is deemed to be a public company within the definition of “public company” u/s 2(71).

7. Broadly, the exemptions relate to: Certain exemptions for entering into related party transactions. Relaxation with regard to the kinds of share capital and voting rights. Shorter period for offering securities to members through right offers. Simple majority for issue of employee stock option plans. Acceptance of deposits from members eased. Relaxation of provisions relating to general meetings. Requirement of mandatory consent of shareholder for certain transactions omitted. Participation of interested directors in the board meetings. Loans to directors permitted subject to conditions.

8. (1) CHAPTER I, SUB CLAUSE (VIII) OF CLAUSE (76) OF SECTION 2 : SHALL NOT APPLY WITH RESPECT TO SECTION 188 Sec. 2(76)(viii) provides that a “related party” with reference to a company means- any company which is- A. a holding, subsidiary or an associate company of such company; or B. a subsidiary of a holding company to which it is also a subsidiary;”

9. RELAXATION With respect to Section 188, a private company shall not be deemed to be a related party of :- its holding, subsidiary or an associate company; a subsidiary of a holding company to which the private company is also a subsidiary [subsidiaries of a common parent] THEREFORE, Any contract or arrangement by a private company with:- its holding, subsidiary or an associate company; or a subsidiary of a holding company to which the private company is also a subsidiary shall not be treated as a “related party transaction” and will not require approval u/s 188.

10. Note:- Although Holding company is excluded but Director(other than independent Director), KMP of holding company or their relatives are still included in definition of Related Party. [Section 2(76)(ix)] RULE 15 of Companies(Meetings and Powers of the board) 2014 needs to amended in light of the above exemption granted. The words ‘except private company’ are required to be added.

11. (2) CHAPTER IV, SECTION 43 AND SECTION 47: SHALL NOT APPLY WHERE MEMORANDUM OR ARTICLES OF ASSOCIATION OF THE PRIVATE COMPANY SO PROVIDES. Section 43 deals with “Kinds of Share Capital” Section 47 deals with “Voting Rights of shareholders on resolutions”.

12. RELAXATION Private Companies will have full flexibility in structuring their share capital. The private companies MAY have only one kind of share capital say preference share capital OR can issue equity shares with differential rights without compliance of following conditions as specified under Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014:  Authorization by Ordinary Resolution (OR).  Aggregate of shares with differential voting rights shall not exceed 26% of the total post issue paid up equity share capital.

13.  Distributable profits for the last three years.  Not defaulted in filing financial statements and annual returns for three financial years.  No subsisting default in the payment of a declared dividend, matured deposits and redemption of preference shares or debentures.  Not defaulted in payment of dividend or term loan.  Not penalized by the court or the tribunal during the last three years. The private companies can determine voting rights of its equity and preference shareholders in any manner it desires by incorporating suitable provision in its memorandum or articles of association.

14. The exemption may boost investments as it gives freedom to private companies in case of joint venture or private equity funding to structure the capital and voting rights. Companies Act, 2013 read with Rules restricted the ability of private companies in issuing shares with differential rights by prescribing conditions related to quantum, past performance and past compliance among others. After the Notification private companies need not comply with such conditions, if permitted to do so by their memorandum or articles.

15. RULE 3 OF COMPANIES(SHARE CAPITAL AND DEBENTURE)RULES,2014 MAY BE AMENDED TO DELETE ‘(b)’ i.e. ‘all private companies’.

16. (3) CHAPTER IV, SUB CLAUSE (i) OF CLAUSE (a) OF SUB SECTION (1) AND SUB SECTION (2) OF SECTION 62: SHALL APPLY WITH MODIFICATIONS. Section 62(1)(a)(i) deals with Time Period of Offer for Rights Issue. Section 62(2) deals with Time period of dispatch of offer letter under Rights Issue.

17. Section 62(1)(a)(i) provides that the time period of offer for rights issue shall not be less than 15 days and not more than 30 days from the date of offer within which the offer, if not accepted, shall be deemed to have been declined. It has been modified to provide that 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. Note:- The time limits cannot be increased, they can only be reduced.

18. RELAXATION A private company need not wait for minimum 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 can not be extended beyond 30 days]. The notice for making the rights offer may be dispatched in less than 3 days period before opening of the issue. A private company may now open and close its rights offer the same day.

19. (4) CHAPTER IV, CLAUSE (b) OF SUB SECTION (1) OF SECTION 62 : WORDS “SPECIAL RESOLUTION” TO BE SUBSTITUTED BY WORDS “ORDINARY RESOLUTION”. Section 62(1)(b) deals with Rights offer to Employees under ESOP.

20. Section 62(1)(b) provides that Rights Offer shall be made to employees under a scheme of employees’ stock option by passing a special resolution. In case of a Private Company, the requirement of passing a special resolution has been done away with and only a ordinary resolution is now sufficient. RELAXATION A Private Company can now make rights offer to its employees under a scheme of employees’ stock option by passing ordinary resolution. The requirement of special resolution has been done away with.

21. RULE 12 OF COMPANIES(SHARE CAPITAL AND DEBENTURE)RULES,2014 MAY ACCORDINGLY BE AMENDED TO INCORPORATE THE ABOVE EXEMPTION. i.e. in sub rule (1) the words ‘special resolution’ should be substituted with “ordinary resolution’.

22. (5) CHAPTER IV, SECTION 67: SHALL NOT APPLY TO CERTAIN PRESCRIBED PRIVATE COMPANIES. Section 67 deals with Restrictions on purchase by company or giving loans by it for purchase of its own shares.

23. Section 67 shall not apply to Private Companies :- (a)in whose share capital no other body corporate has invested any money; (b) if the borrowings of such a company from banks or Financial Institutions or any body corporate is less than twice its paid up share capital or 50 crore rupees, whichever is lower; and (c) such a company is not in default in repayment of such borrowings subsisting at the time of making transactions under this section.

24. Section 67 provides that No company limited by shares and having a share capital shall have power to buy its own shares unless the consequent reduction of share capital is effected under the provisions of the Act. No company shall give, directly or indirectly, any financial assistance for the purpose of purchase of its own shares. RELAXATION The above provision does not apply to above mentioned private companies and such companies may now buy its own shares.

25. (5) CHAPTER V, CLAUSES (a) TO (e) OF SUB SECTION (2) OF SECTION 73 : SHALL NOT APPLY TO PRIVATE COMPANIES, ACCEPTING FROM ITS MEMBERS MONIES NOT EXCEEDING 100% OF AGGREGATE OF THE PAID UP SHARE CAPITAL AND FREE RESERVES. Section 73(2) clauses (a) to (e) deals with the conditions for acceptance of deposits by company from its members.

26. Conditions (a) to (e) of Sec 73(2) shall not apply to a Private Company:- Issuance of a circular to members; Filing a copy of circular with ROC in 30 days; Deposit 15% amount in a separate bank a/c; Providing deposit insurance; Certifying that company has not committed any default in repayment of deposits/interest

27. RELAXATION A Private Company may accept from its members deposits up to 100% of aggregate of the paid up share capital and free reserves without fulfilling conditions (a) to (e) u/s 73(2). But, The Private Company shall file details of deposits so accepted to the Registrar. MCA may modify Rule 3(3) of the Companies (Acceptance of Deposits) Rules, 2014, which states that maximum amount of deposit that a company may accept from its members shall not exceed 25% of its paid-up share capital and free reserves.

28. (7) CHAPTER VII, SECTIONS 101 TO 107 AND SECTION 109 : SHALL APPLY UNLESS OTHERWISE SPECIFIED IN RESPECTIVE SECTIONS OR THE ARTICLES OF THE COMPANY PROVIDE OTHERWISE. Notice of general meeting (u/s 101) Statement to be annexed to notice (u/s 102) Quorum for meetings (u/s 103) Chairman of meetings (u/s 104) Proxies (u/s 105) Restriction on voting rights (u/s 106) Voting by show of hands (u/s 107) Demand for poll (u/s 109).

29. RELAXATION Private Companies now have the option to provide for their own regulations with respect to notice of general meeting, statement to be annexed to notice, quorum for meetings, chairman of meetings, proxies, restriction on voting rights, voting by show of hands and demand for poll to the exclusion of the corresponding provisions of the Companies Act, 2013 It will provide substantial relaxation in administration of general meetings.

30. (8) CHAPTER VII, CLAUSE (G) OF SUB SECTION (3) OF SECTION 117 : SHALL NOT APPLY. Section 117(1) provides that a copy of every resolution in respect of matters specified in sub- section (3) shall be filed with ROC within 30 days of passing of the resolution. Section 117(3)(g) specifies “ resolutions to be filed with the Registrar passed in pursuance of sub- section (3) of section 179”

31. Section 179(3) provides that Board shall exercise certain powers by means of a resolution passed at meeting of the Board:- Make calls on the shareholders Issue securities Borrow monies Invest funds of the company Approve financial statements Approve merger, amalgamation Private companies have now been exempted from provisions of Section 117(3)(g)

32. RELAXATION The requirement of filing Form No. MGT. 14 for resolutions passed by the Board in exercise of its powers u/s. 179(3) is no longer applicable to a private company. It is a major relief as private company board minutes are a internal matter for the company and the filing requirement was perceived as a huge compliance burden.

33. (9) CHAPTER X, CLAUSE (g) OF SUB SECTION (3) OF SECTION 141 : SHALL APPLY WITH MODIFICATIONS Section 141(3) deals with conditions for eligibility for appointment as an auditor of a company. Section 141(3)(g) limits the number of audits by an auditor to twenty companies. Now the words “other than One person companies, dormant companies, small companies and private companies having paid-up share capital of less than Rs 100 crores” have been inserted after twenty companies.

34. RELAXATION While computing the limit of 20 companies, the one person companies, dormant companies, and the private companies with the paid up share capital of less than rupees 100 crores will be excluded. A Private Company having paid-up share capital of less than Rs 100 crores may appoint its Auditor irrespective of the limit of 20 audits provided u/s 141(3)(g). It provides flexibility to a private company in appointment of its auditor.

35. (10) CHAPTER XI, SECTION 160 : SHALL NOT APPLY Section 160 deals with right of persons other than retiring directors to stand for directorship subject to 14 days notice in writing before the meeting along with the deposit of Rs. one lac.

36. RELAXATION Private companies are free to include suitable provision in their AOA for eligibility of a person (other than retiring director) to be appointed as director of the company. Persons other than retiring directors may now stand for directorships in such companies:-  without leaving a written notice, 14 days before the meeting; and  without deposit of Rs. one lac.

37. (11) CHAPTER XI, SECTION 162 : SHALL NOT APPLY Section 162 deals with appointment of directors to be voted individually. RELAXATION Private Companies are exempted from Section 162 and can now move a motion at its general meeting for appointment of two or more persons as directors of the company by a single resolution.

38. (12) CHAPTER XII, SECTION 180 : SHALL NOT APPLY Section 180 provides that the Board shall exercise certain powers only with the consent of the company by a special resolution: To sell, lease or dispose of the whole or substantially the whole undertaking; To invest otherwise in trust securities the compensation for merger or amalgamation; To borrow money in excess of aggregate of paid up share capital and free reserves; To remit, or give time for repayment of any debt due from a director.

39. RELAXATION The Board of Directors of a private company may exercise the above mentioned powers without restrictions u/s 180 i.e, without obtaining the consent of the company by a special resolution.

40. (13) CHAPTER XII, SUB-SECTION (2) OF SECTION 184: SHALL APPLY WITH THE EXCEPTION THAT THE INTERESTED DIRECTOR MAY PARTICIPATE IN SUCH MEETING AFTER DISCLOSURE OF HIS INTEREST Section 184 deals with disclosure of interest by director. Section 184(2) prohibits interested director from participating in the Board meeting.

41. RELAXATION Now in a private company an interested director may participate in a board meeting after disclosing his interest. Although, this provision will certainly lead to ease of decision making by private companies, there seems to be some anomaly. Such an interested director may participate in a Board 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).

42. (14) CHAPTER XII, SECTION 185 : SHALL NOT APPLY SUBJECT TO CERTAIN CONDITIONS Section 185 provides that no company shall advance any loan to any of its directors or to any other person in whom the director is interested.

43. Section 185 shall not apply to a private company if the following conditions are fulfilled: (a)in whose share capital no other body corporate has invested any money; (b) if the borrowings of such a company from banks or Financial Institutions is less than twice of its paid up share capital or Rs. 50 crores, whichever is lower;and (c) such a company has no default in repayment of such borrowings subsisting at the time of making transactions u/s 185.

44. RELAXATION Now, private companies fulfilling specified conditions can advance loan to any of its directors or to any other person in whom the director is interested. It can also give guarantee or provide any security in connection with any loan taken by any of its directors or to any other person in whom the director is interested.

45. (15) CHAPTER XII, SECOND PROVISO TO SUB- SECTION (1) OF SECTION 188 The second proviso to Section 188(1) which provides as under shall not apply to a private company. “Provided further that no member of the company shall vote on such resolution to approve any contract or arrangement which may be entered into by the company, if such member is a related party”.

46. RELAXATION A special feature inserted in respect of RPTs is that in general meeting for approval of a related party transaction, a member who is a related party is not allowed to vote on such a resolution. This provision shall not apply in case of private companies. If a private company enters into any contract or arrangement with a related party requiring prior approval of the company, the related parties are now allowed to vote on such a resolution. This is a big relief to private companies as having disinterested members was not at many times possible in private companies where there are few members who are mostly related to each other.

47. (16) CHAPTER XIII, SUB SECTION (4) AND (5) OF SECTION 196: SHALL NOT APPLY Section 196(4) deals with approval of the terms and conditions of appointment of managerial personnel by board meeting/general meeting/central government as the case may be. Section 196(5) deals with validating actions of managerial personnel, if the appointment is not approved by a company in general meeting.

48. RELAXATION In case of a private company, appointment of a managing director, whole-time director or manager and the terms and conditions of such appointment and remuneration payable does not require the approval at the General meeting and subsequently the approval of Central Government is also not required, even if the conditions for appointment are not as per the requirements of Schedule V of the Companies Act 2013.

49. Private companies have a critical role to play in the growth of the economy. The exemption notification for private companies is a much awaited one. With these exemptions, it is expected that many companies would be able to carry on their businesses with ease.

50. Thank you