MCA’s Exemption Notification for Government Companies

[The
following guest post is contributed by Vinita
Nair
of Vinod Kothari & Co. The author may be contacted at vinita@vinodkothari.com.]
By way of a
notification dated June 5, 2015 exempted
Government companies
, private companies, section 8 companies and nidhi companies
from complying with certain provisions of the Companies Act, 2013 (“Act, 2013”
or “Act” or CA 2013) as mentioned below subject to the condition that the
company ensures protection of shareholders’ interests. The exemption
notification has been published in Official Gazette.
Section 620 of
the Companies Act, 1956 also empowered modification of the Act in relation to
Government companies. Several notifications were issued under that for
exempting or modifying the applicability of the provisions of that legislation.
I. Exemption to all Government Companies:
1. By way of
alterations to section 4(1)(a), the memorandum of a Government company shall
state name of the Company with the last expression “Limited”;
2. In case of
Government companies the requirement under Section 56 (1) for proper instrument
of transfer duly executed and stamped shall not be required with respect to
bonds issued by Government company provided that an intimation is given by the
transferee specifying his name, address and occupation and delivered to the
Company along with the bond certificate, if any or with the letter of allotment
of the bond.
Furthe,r the requirement proper
instrument of transfer duly executed and stamped shall also not apply in case
of transfer of securities held by nominees of the Government.
3. A
Government company need not comply with the provisions of Section 89 relating
to declaration in respect of beneficial interest in any share. Consequentially,
the provisions of Section 90 relating to investigations of beneficial ownership
of shares in certain cases by Central Government shall also not apply to
Government Company.
4. A
Government company shall hold an annual general meeting (AGM) of the company at
the registered office or such other place as the Central Government may approve
in this behalf, pursuant to provisions of section 96 (2).
5. A
Government company need not comply with the provision of section 134(3)(e)
relating to specifying the companys
policy on directors appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director
and other matters provided under sub-section (3) of section
178.
6. The restriction of having a maximum
of 15 directors, unless approved by members by passing special resolution under
Section 149 (1) (b) read with first proviso, shall not apply in case of
Government companies.
7. The independent directors
being appointed should be persons of integrity and possess relevant expertise
and experience in the opinion of Ministry or Department of the Central
Government which is administratively in charge of the Company, or as the case
may, the State Government.
8. The
restriction with respect to independent director not having pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during
the two immediately preceding financial years or during the current financial year
as specified under section 149(6) (c) shall not apply to a Government company.
9. A Government company need not obtain consent letter from
directors and file the same with the Registrar of Companies (RoC) within 30
days of appointment as required under section 152(5) where the appointment of
such a director is carried out by the Central Government or State Government,
as the case may be.
10. The
disqualification specified under section 164 (2) pertaining to ineligibility of
a director of following company from being appointed/ re-appointed as a
director of the Company shall not apply to a Government company:
– which has
not filed financial statements or annual returns for any continuous period of
three financial years; or
– which has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more.
11. The Audit
Committee of a Government company shall recommend remuneration of auditors. The
recommendation for appointment and terms of appointment as required under
Section 177 (4) (i) shall not be required to be included in the Terms of
Reference of Audit Committee.
12. Provision
of Section 163 relating to proportional representation for appointment of
directors on the Board shall not apply.
13. The
requirement specified under section 178(2), (3) and (4) with respect to
identification of directors, senior managerial personnel by the Nomination and
Remuneration Committee , framing of criteria for determining qualifications, positive attributes and independence of a director and framing policy thereof, will
be applicable only for appointment of ‘senior management’ and other employees.
14. A
Government company is not required to comply with provisions of section 196
(2), (4) and (5) dealing with the following:
– Restriction on appointing or re-appointing any person as its managing
director, whole-time director or manager for a term exceeding
five years at a time;
– Approval of
terms and conditions of such appointment approved by the Board of Directors at a meeting, by a resolution at the next general meeting of the company and
by the Central Government in case such appointment is at variance to the conditions specified in Schedule
V;
15. A
Government company is not required to comply with provisions of section 197
which specifies limits for overall maximum managerial remuneration and
managerial remuneration in case of absence or inadequacy of profits.
16. The
provisions of sub-section (1), (2), (3) and (4) of Section 203 with respect to
appointment of key managerial personnel, holding of office, period within which
appointment to be made in case of vacation of office of key managerial
personnel (KMP), will not apply to a managing director or Chief Executive
Officer or manager and in their absence, a whole-time director of the
Government company.
17. In case of
Government company, no court shall take cognizance of any offence under this
Act which is alleged to have been committed by any company or any officer
thereof, except on the complaint in writing of a person authorised by the
Central Government in that behalf. The Court shall not take cognizance of any
offence on a complaint made by the Registrar or shareholder of the company as
specified under Section 439 (2) of CA, 2013.
II. Exemption
to such Government Companies whose entire paid up share capital is held by the
Central Government, or by any State Government or Governments or by the Central
Government and one or more State Governments:
1. In case of
inadequacy of profits, such Government company can declare dividend without
complying with the requirements of Rule 3 of Companies (Declaration and Payment
of Dividend) Rules, 2014.
2. Such
Government company need not deposit amount of dividend, including interim
dividend in a separate bank account within 5 days from the date of declaration
of such dividend as specified under section 123 (4).
3. The
requirement of retirement of directors by rotation under section 152 (6) shall not apply.
Consequently, the provision pertaining to vacancy of retiring director not
being filled at the meeting as provided under section 152 (7) shall also not
apply.
4. The
requirement of providing notice of candidature in case of appointing a director
other than a retiring director under section 160 shall not apply.
5. A motion can be moved for the appointment of two or more persons as directors of the company by a single resolution. The provisions of section 162
shall not apply to such government company
.
6. Provision
of section 163 relating to proportional representation for appointment of
directors on the Board shall not apply.
7. Provisions
of section 170 shall not apply. Such Government company shall not be required
to maintain Register of directors and key managerial personnel and their
shareholding under section 170. Consequently, the provision pertaining to
inspection of the register maintained under section 170 as provided under section
171 shall also not apply. Further, section 170 also mandates filing of return
for appointment of director and KMP in DIR-12. This requirement also has been
exempted.

III. Exemption to such Government
Companies that have obtained approval of the Ministry or Department of the
Central Government which is administratively in charge of the Company, or as
the case may be, the State Government:

1. A Government company whose directors are evaluated by the Ministry or
Department of the Central Government which is administratively in charge of the
company, or as the case may be, the State Government, as per its own evaluation
methodology need not include statement disclosing the manner in which formal
annual evaluation has been made by the Board of its own performance and that of
its committees and individual directors as stipulated under section 134 (3)(p).
2. Section 185 prohibiting granting of loans
to directors and to any other person in whom director is interested
shall not apply to Government companies in case such company obtains approval
before making any loan or giving any guarantee or providing any security or
making any investment under the section.
3. Provisions of section 186 with respect to loans and investment by
company shall not apply to a Government company, other than a listed company in
case such company obtains approval before making any loan or giving any guarantee or providing any
security or making any investment under the section.
4. A
Government company, other than a listed company, is not required to comply with
provisions of first and second proviso of section 188 which restricts companies
from entering into related party transactions exceeding specified values
without obtaining prior approval of shareholder and also restricts related
party who is a party to the contract, to abstain from voting in case such
company obtains approval before
entering into such contract or arrangement.
IV. Exemption
to Government Companies engaged in defense production:
1. Section 129
pertaining to financial statement shall not apply to a Government company to
the extent of application of Accounting standard 17 (Segment Reporting) to the
companies engaged in defense production.
2. Provisions
of Section 186 with respect to loans and investment by company shall not apply
V. Exemption
to subsidiary whose entire paid up share capital are held by such Government
Companies whose entire paid up share capital is held by the Central Government,
or by any State Government or Governments or by the Central Government and one
or more State Governments:
1. The
requirement of retirement of directors by rotation shall not apply.
Consequently, the provision pertaining to vacancy of retiring director not
being filled at the meeting as provided under section 152 (7) shall also not
apply.
2. The
requirement of providing notice of candidature in case of appointing a director
other than a retiring director under section 160 shall not apply.
3. A motion can be moved for the appointment of two or more persons as directors of the company by a single resolution. The provisions of section 162
shall not apply to such government company
.
VI. Exemption
to a Government company on entering into contract or arrangement with another
Government company:
1. Such government companies are not required to comply with provisions
of first and second proviso of section 188 which restricts companies from
entering into related party transactions exceeding specified values without
obtaining prior approval of shareholder and also restricts related party who is
a party to the contract, to abstain from voting.
Conclusion
The exemptions will making
it easier for Government companies to comply with certain provisions of Act,
2013.
It is pertinent to note
that in case of Government Companies these provisions were also formerly
exempted by ways of notifications issued under Section 620 of Act, 1956. Most
of the exemptions are the same as those provided under the erstwhile
notifications. The new provisions exempted for a Government company include
exemptions under Sections 134 (3) (e) & (p), 149, 177, 178 and 203 of Act,
2013.
– Vinita Nair

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

2 comments

  • Point number 12 in "I. Exemption to all Government Companies" is incorrect as it only applies in the case of "II. Exemption to such Government Companies whose entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments:" and "Exemption to subsidiary of a Government company referred to in (II), in which the entire paid up share capital is held by that Government Company".

  • point no.7 – exemptions under section 170 is not only limited to appointment but also changes. in other words, the wholly owned government companies need not file dir-12 not only for appointments but for cessations also.

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