Vol. 12 Issue 6.1 June 9, 2015

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Government relaxes applicability of certain provisions of the

Companies Act, 2013 to private companies

The Ministry of Corporate Affairs (“MCA”) has, by issue of a notification dated June

5, 2015 (“Notification”), directed that certain provisions of the Companies Act, 2013

(“Co Act”) shall not apply to private companies, or shall apply with such modifications

as may be prescribed. It may be recalled that in July 2014, a draft notification

providing for such relaxations for private companies was introduced in the

Parliament under section 462 of the Co Act – this step was largely in response to

stakeholder feedback expressing the need for greater operational flexibility, and a

relatively less stringent regulatory environment, for private companies, which in

essence do not involve large public participation.

The draft notification having passed through the due process under section 462, and

issued as final by the MCA, this update takes a look at some of the key relaxations

brought about for private companies. Note that, in our view, these relaxations

should be available to private companies coming within the definition given in section

2(68) of the Co Act. Accordingly, the benefits may not be available to private

companies, which are subsidiaries of a public company, since they are deemed to

be public under proviso to section 2(71) of the Co Act.

1. Related Party Transactions

Under section 2(76)(viii) of the Co Act, the holding company, subsidiaries,

associates and fellow subsidiaries of a company are treated as its related parties.

The concept of related parties primarily finds relevance in the context of section

188 of the Co Act, which provides that certain transactions with related parties

require board/ shareholder approval unless the same are in ordinary course of

business and at arm’s length. The Notification provides that in relation to a private

company, entities specified in section 2(76)(viii) shall not be treated as its related

parties for the purposes of section 188 of the Co Act. Therefore, by virtue of this

change, transactions proposed to be entered by a private company with its

holding company, subsidiaries etc, shall not require board/ shareholder approval

of such private company. However, if the counter-party to such a transaction is a

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public company, the counter-party shall continue to be governed by the provisions

of section 188 of the Act.

Another relief provided by the Notification is that in case a transaction requires

shareholder approval under section 188, in case of private companies,

shareholders who are related parties shall now have a right to vote on such

resolutions. As per the provisions of section 188, in case of public companies,

such shareholders would not have voting rights in similar situations.

2. Shares with Differential Dividend or Voting Rights

Under section 43 of the Co Act, a company could have only 2 categories of shares

– equity and preference, the rights of which were prescribed under section 43 and

47. Equity shares with differential dividend and voting rights were permissible, but

only subject to certain conditions.

The Notification provides that sections 43 and 47 shall not apply to a private

company if the memorandum and articles of such company so provide. This gives

ability to private companies to structure investments by external investors by

issuing special classes of shares.

3. Issue of share capital

Sections 62(1)(a)(i) and 62(2) of the Co Act provide that in case of rights issue,

the rights offer has to be kept open for a certain period, and also, the notice of

rights issue has to be dispatched in a prescribed manner. The Notification

provides that private companies shall be exempt from these requirements, in case

90% of the members have given their consent in writing to shorter notice periods.

Similarly, the Notification provides that in case of issue of shares under ESOPs,

private companies shall require an ordinary resolution of its members, as against

special resolution which was hitherto required under section 62(1)(b).

4. Power to purchase own shares

Under section 67(1) of the Act, a company limited by shares is prohibited from

purchasing its own shares unless a consequent reduction of capital is effected

under the provisions of the Act. Private companies have now been exempted

from this requirement, subject to such company meeting the following criteria:

No body corporate has invested any money in its share capital

Borrowings of such company from banks/ financial institutions/ other body

corporates are less twice its paid up share capital, or Rs 50 crores, whichever

is lower

Vivek Gupta, New Delhi

+91 124 669 5052

vivek.gupta@bmradvisors.com

Rajendra Nalam, Mumbai

+91 22 6135 7066

rajendra.nalam@bmradvisors.com

Kalpesh Maroo, Bangalore

+91 80 4032 0090

kalpesh.maroo@bmradvisors.com

Kalpesh Desai, Mumbai

+91 22 6135 7015

kalpesh.desai@bmradvisors.com

Siddharth Sehgal

The company is not in default in repayment of such borrowings

Interestingly, this flexibility was not available to private companies even under the

provisions of section 77 of the Companies Act, 1956. Accordingly, in concept,

eligible private companies could undertake capital reduction without undergoing a

Court process, though, they may be required to comply with norms prescribed for

buyback under section 68 of the Co Act (it would be helpful if the Government

provides further clarity on this matter).

The provisions of section 67(2), which prohibited provision loans, financial

assistance, etc by a company for purchase / subscription of its own shares or its

holding company’s shares were applicable only to a public company, and the

position does not change with the Notification.

5. Power of the Board to transact certain matters specified in section 180 of

the Co Act

Under section 180 of the Co Act, the Board can exercise its powers in respect of

identified matters (such as sale/ disposal of undertakings of a size above a

defined threshold, borrowing of money beyond paid up share capital and free

reserves etc) only with the consent of the shareholders via a special resolution.

The Notification provides that section 180 shall not apply to private companies,

thereby empowering the Boards of such companies to transact specified matters

without a special resolution.

6. Loans to directors and entities in which they are interested under section

185 of the Co Act

Under section 185 of the Co Act prohibits loans by companies to their directors

and/ or entities in which they are interested, barring a few exceptions. Per the

Notification, the provisions of this section not apply to private companies which

meet the criterial mentioned in Para 4 above. While this provides some degree of

relief, the requirement of a private company not having investment in its share

capital from another body corporate restricts freedom in case inter corporate loans

have to be arranged.

7. Appointment and remuneration of managerial personnel

Under section 196(4) read with section 197 and Schedule V of the Co Act,

appointment and terms of remuneration to managerial personnel (ie managing

directors/ managers/ whole time directors) was subject to certain prescribed

conditions. If the prescribed conditions were not met, an approval of the Central

Government was required. The Notification exempts private companies from

section 196(4) meaning thereby that private companies can appoint personnel,

and agree on such terms of remuneration, which may not be in accordance with

Schedule V of the Co Act. Further shareholder approval for such appointments,

as required by section 196(4) would not be necessary.

8. Deposits from members

Under section 73 of the Co Act, companies can raise deposits from their members

subject to certain prescribed requirements (which, inter alia, include, publishing of

a circular, creation of reserves for redemption, provision of deposit insurance, etc).

The Notification provides that such requirements shall not apply in case of a

private company which accepts deposits from its members not exceeding 100% of

its paid up share capital and free reserves.

9. Conduct of general meetings

The Notification provides that the provisions of sections 101 to 107 and 109 of

the Co Act, which provide for matters in connection of conduct of general

meetings by companies (ie provision as to notices, quorum, chairmen, manner

of voting etc) shall apply unless otherwise specified in the articles of a private

company. This effectively provides flexibility to private companies to prescribe

their own regulations as to the conduct of meetings in their articles, as was

largely the position under the Companies Act, 1956.

In addition to the above, additional relief has been provided to private companies in

matters relating to filing of certain resolutions with jurisdictional Registrars of

Companies, manner of reckoning audit engagements for the purposes of

determining qualification of auditors, deposit requirements in case of nomination of a

person (other than a retiring director) to directorships, etc.

BMR Comments

While the Notification is definite step forward and should provide a degree of

flexibility in case of private set-ups, the reliefs fall short of industry

expectations on certain counts. The most prominent element would be

availability of exemptions to private companies which are subsidiaries of

public companies. While not all exemptions could have been provided to

such companies in view of the fact that they do have indirect public

participation, some relief especially with regard to issue of shares with

differential rights, manner of conduct of meetings, etc would have been

definitely welcome. Another significant expectation not met is exemption

from applicability of norms for preferential issues under section 62(1)(c) of

the Co Act, which presented some challenges in structuring growth capital

investments in private companies. One would hope that these issues are

looked at and addressed suitably by the recently constituted Companies

Law Committee, which has been given the mandate to make

recommendations to the Government on issues arising from the

implementation of Co Act.

BMR Business Solutions Pvt. Ltd.

36B, Dr. RK Shirodkar Marg, Parel, Mumbai 400012, India

Tel: +91 22 6135 7000 | Fax: +91 22 6135 7070

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