guest post is contributed by Vinod
Kothari and Aditi Jhunjhunwala of
Vinod Kothari & Co. The authors may be contacted at email@example.com and firstname.lastname@example.org respectively.]
already been subjected to unprecedented compliances required under the
Companies Act, 2013 (the “Act”) given the financial year-end deadline of March
31, 2015. Ever since July 2014 when the draft
of an exempting notification was placed before the Parliament, the
corporate sector in the country, primarily the small and medium companies, and
the thousands of foreign-owned or controlled companies which are mostly private
companies, have been anxiously waiting for this notification. However, as the
archaic process of exempting notifications requires, a copy of the draft
notification had to be placed on the floor of the Parliament for minimum of 30
business days, and then one more session of the Parliament had to end before
the notification could have been issued.
Parliament, the decks were cleared for the exempting notification for 4
different classes of companies – (i) private companies, (ii) section 8
companies, (iii) government companies, and (iv) Nidhi companies. Needless to
say, the private company exempting notification is the most important, as it
covers nearly 90% of the companies by number.
for private companies issued by the Ministry of Corporate Affairs (MCA) on June
5, 2015. The notifications for the other three types of companies listed above
can be found on the MCA
Reduced: Filing of Board Resolutions Waived for Private Companies
from filing board resolutions under section 179(3) of the Act. This section,
whose philosophical foundations are difficult to understand, requires companies
to file some 14 items of board resolutions
with the Registrar of Companies in a form called MGT 14, has completely been
exempted in case of private companies, by snapping the connection between
section 117(3)(g) and section 179(3). Therefore, private companies will now
need to file only MGT 14 in case of special resolutions. In terms of compliance
burden, this is a major relief.
exempted. That is, wherever there is a matter being one of the items listed in
this sub-section, the resolution of the board will still be required. All that
is exempted is the need to file a resolution with the Registrar. Despite this,
the exemption from filing is a major relief as private company board minutes
are a internal matter for the company.
Interested Directors: Section 184
section provides that the directors of a private company must refrain from
participating in a board meeting where a matter in which they are interested is
to be discussed. This is absolutely counter-intuitive in case of private
companies, which actually do not have any independent directors, and therefore
it is not expected that there will be any director who is uninterested in the
matter. The original draft of the notification did not provide an exemption
from section 184(2), but the final text does provide the exemption. The final
notification thankfully retains the same with the condition that an interested
director may participate only after disclosure of such person’s interest.
However, curiously, one of the most burdensome disclosures in case of private
companies – disclosures by all directors about their shareholdings, and every
time there is a change therein – still remains intact [section 184 (1)]
of Board No Longer Applicable to Private Companies
section 293 of the Companies Act, 1956 (the “Act 1956”). That is to say, the
exercise of borrowing powers by private companies will not necessitate any
transactions, particularly for guarantees and collaterals. This is one
provision where banks themselves are greatly concerned as they are finding it
increasingly difficult to seek guarantees and collaterals from related
giving a loan, providing a guarantee or offering a security in connection with
a loan taken by a sister concern. There are 3 cumulative conditions for
availing the exemption:
the lending/guaranteeing company;
borrowings from other bodies corporate or banks or financial institutions is
limited to the lower of:
of such borrowings by the lending company.
of inter-corporate deposits as well, thereby effectively serving as a limit on the
debt-to-equity ratio. Also the fact that the private company should not have a
corporate shareholder makes the exemption largely meaningless, since inter-corporate
shareholdings are a preponderant reality of the corporate world. Moreover, what
malaise is this limitation seeking is redress is far from clear. These futile
limitations in granting exemptions puts a big question mark on the philosophy
of the new Act in extending all provisions to all companies, and keeping
carve-outs to a power of administrative notification.
companies was not present under the Act 1956. The underlying argument was
simple – since a private company is essentially a pool of private capital,
there cannot be a regulatory reason as to why a private company cannot lend to
other entities in which directors have interest. After all, if private
companies do not lend to their own entities, whom else will they lend to?
Disregarding the economic rationale of the argument, the conditional exemption
to private companies seems to prevail on an argument that even though a private
company is a private pool of capital, the directors or the shareholders are
still not free to lend money to other sister companies. This is one restriction
that seems to fuel the boom of limited liability partnerships (LLPs) in the
own shares, or the providing of loans against its own shares. There are,
actually, 3 related sections – section 66 prescribing the process of reduction
of capital, section 67 prohibiting a company from buyback of its shares unless
section 66 is complied with, and from lending against its own shares, and section
68 laying down the conditions and process of buy back of shares.
subject to the following conditions:
corporates is less than double of its paid up capital of Rs. 50 crore,
whichever is lower.
defaulted in repayment of borrowings as may exist on the date of the
transaction under the section.
from section 66 or section 68. This implies that the exemption is only one for
lending against shares. If the idea of the exemption was to relax the
conditions for buy back of shares, there would have been exemption from section
68 or section 66 as well. It does not sound reasonable that a limited liability
company would have been let free to buy its shares without any restraint at
debate on whether deposits taken by private companies from its members taken
under the Act 1956, that is, before April 1, 2014 also had to comply with the strict
provisions of new Act and hence requiring compliance with filing and repayment
pursuant to section 74 and its allied rules. MCA vide the General
Circular 05/2015 dated March 30, 2015 granted to private companies relief
from this compliance clarifying that such amounts taken from
directors/directors’ relatives and members under the provisions of the Act 1956
will not constitute deposit under the new Act.
loans/deposits from their shareholders, up to a limit of 100% of net worth, had
found its place in the final text and is also now a part of the final
notification. It is notable that shareholders’ loans in case of private
companies were fully exempted from the purview of deposit restrictions under
the Act 1956. The Deposit Rules under the new Act brought that restriction,
purportedly owing to deposit scams in the Eastern region. As it stands in the
final text of the notification, a private company may accept deposits from its
shareholders, up to a limit of 100% of its net worth. This is, of course,
subject to a filing requirement. Note that a violation of sections 73 and 74
attracts major penal consequences, with imprisonment up to 7 years and a fine
up to Rs. 10 crores. The offence is non-compoundable.
person companies, dormant companies, small companies, and private companies
having a paid up share capital of less than Rs. 100 crores. In the draft
notification, private companies were completely excluded from the limit.
Than Retiring Directors to Stand for Directorship
companies. Similar was the position under section 257 of the Act 1956.
Directors No Longer to be Voted Individually
section 263 in the Act 1956. However, seemingly the lawmakers thought this to
be a very vital provision of concern to private companies and have therefore
removed private companies from the ambit of section 162.
in Case of Related Party Transactions
related party transactions (“RPTs”). The draft notification had proposed a full
exemption to private companies from section 188 pertaining to RPTs. The final
notification restores restrictions on RPTs in case of private companies, with
the following riders:
meeting approval in case of RPTs is that the resolution has to be approved by a
vote of the minority only. Related parties are not allowed to vote on such
resolution. This provision has been taken off in case of private companies.
of “related parties” in section 2(76), holding-subsidiary relationships, and
investor-associate relationships have been excluded from related party relationships.
The net result of these changes will be as follows:
companies to enter into RPTs. Private companies cannot be dealing with parties
at arms-length, as it is sheer commonsense to say that private companies deal
with parties close to them, rather than those who are unrelated.
companies will still come within the ambit of section 188 since most of these
transactions are covered by the “common director” or “common shareholder”
clause of section 2(76), and not by holding-subsidiary or investor-associate
188, it will require board and general meeting approval, if the transaction
size, thresholds are crossed. RPTs may come under the section due to the
relative contract value.
general meeting resolution. The only saver is that in such a general meeting,
even related parties may vote. Thus, getting the sanction of the general
meeting may not be a problem, but the section will remain a sheer compliance
burden on private companies.
Unless the memorandum
of association (“MoA”) or articles of association (“AoA”) of private
companies provides for it, the same shall not be applicable. Alternatively,
where the MoA/AoA of a private company provides exemption from the same, it
shall not be applicable.
with regard to time period of offer in case of rights issue are exempted for
of sending the notice 3 days prior to opening of the issue by way of
specified means under rights issue is now exempted.
except that instead of special resolution, ordinary resolution would be
to 107 and section 109
section specifically requires or it is provided in the articles of a private
company, the provisions with respect to general meetings shall not apply.
196(4) and 196(5)
with respect to approval of terms and conditions of appointment including
remuneration of managerial personnel and validity of actions done by them
where appointment is not in accordance with the provisions of the said
section, is not applicable to private companies.
obviously one of the most important instruments of doing business in India,
must occupy a key place in the Prime Minister’s objective of making India a
good place to do business. Scare little has been done by way of the exempting
notification, even less by the Companies (Amendment) Act 2015. Therefore, all
eyes are now on the Committee, which is to review the implementation of the