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Companies Act 2013: Does it serve the purpose of its introduction?

Government of India came up with the new Companies Act 2013 to scrap the age old Companies Act 1956; the Act that deals with company law matters in India.

The motive behind introduction of the Companies Act 2013 was to facilitate business in India and bring more transparency in ease of doing business in India. However, the new Act could not serve the purpose to address the issues of start-up and regulatory compliances difficulties faced by them in particular. Stakeholders complaining of such a draconian law prompted the present government to re-look into the Act. Since the introduction of Companies Act 2013 there have been many amendments, including exemptions and other sops granted to the industry and stakeholders at large.

The Companies Act 2013 made people to think twice before setting up a company. Queries raised by would-be promoters or founders were whether one should start a Private Limited Company or an LLP (Limited Liability Partnership). The answer was quite simple that with the new law in place every professional were novice and interpreting the law and applying it flawlessly was indeed a difficult part for everyone, and the biggest problem was for the start-ups who wanted more hassle-free business environment.

Looking into all these issues that the start-up eco-system was facing, Government of India came up with Exemption Notification for Private Limited Companies with respect to Companies Act 2013.

Non-requirement of filing MGT 14 with RoC for Board Resolutions under Sub-Section 3 of Section 179

Section 179(3) states that:

The Board of Directors of a Company shall exercise the following powers on behalf of the Company by means of a resolution passed at meetings of the Board, namely:-

(a) to make calls on shareholders in respect of money unpaid on their shares;
(b) to authorize buy-back of securities under Section 68;
(c) to issue securities, including debentures, whether in or outside India;
(d) to borrow monies;
(e) to invest the funds of the Company;
(f) to grant loans or give guarantee or provide security in respect of loans;
(g) to approve financial statement and the Board’s report;
(h) to diversify the business of the Company;
(i) to approve amalgamation, merger, or reconstruction;
(j) to take over a company or acquire a controlling or substantial stake in another company;
(k) any other matter which may be prescribed.

In respect of the above, only passing of Board Resolution would suffice and there is no need of filing MGT 14 for the same with the RoC.

Restrictions on the powers of Board under Section 180 of the Companies Act 2013 shall not apply to Private Companies

Section 180 states that:

180(1) The Board of Directors of a Company shall exercise the following powers only with the consent of the Company by a Special Resolution, namely:

(a) to sell, lease, or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings;

(b) to invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation;

(c) to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business;

In respect of the above clauses, a Private Limited Company is not required to pass Special Resolution and just Board Resolution would suffice.

Limit on appointment of Auditor in more than 20 companies done away with certain modifications

After the exemption notification, Clause (g) of sub-section (3) of Section 141, reads as follows:

An Auditor shall not be appointed as an auditor in more than 20 companies other than:

(a) OPC (one Person Companies)

(b) Dormant Companies

(c) Small Companies [means other than a Public Company whose paid-up capital does not exceed Rs.50 lacs and turnover as per the last Profit & Loss does not exceed Rs.2 crores].

(d) Private Limited Companies having a paid-up share capital of less than Rs.100 crores.

This means that an auditor can be appointed as an auditor in more than 20 companies only in the above certain cases.

Related parties can also participate and vote in a General Meeting resolution

With the advent of exemption notification, the benefit that has been granted is, now a related party can also participate and vote in a general meeting in respect of Private Limited Companies. It may please be noted that passing of resolution has not been done away with, resolution still has to be passed, however a related party can attend and vote in that meeting after disclosing his / her interest.

Exemptions in respect of Further Issue of shares

Sub-section (1) and (2) of Section 62 states certain procedures to be followed for further issue of shares with respect to time. It states that:

A Company having a share capital if proposes to increase its subscribed capital by the issue of further shares, such offer shall be made by notice specifying the number of shares offered and limiting a time not less than 15 days and not exceeding 30 days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined.

Further, the notice stated above shall be despatched through registered post or speed post or through electronic mode to all existing shareholders at least 3 days before the opening of the issue.

The above time limit in respect of notice, opening and closing of the offer, shall not apply to Private Limited Companies, if 90% of the members agree and give consent in writing.

Appointment of Directors

Section 160 related to appointment of Directors shall not apply to Private Limited Companies. It states that:

A Director other than a retiring director shall be eligible for appointment to the office of the Director in a general meeting if the individual himself, or some other member intending to propose him as a director, has not less than 14 days before the meeting, left at the registered office of the Company, a notice in writing under his hand signifying his candidature as a director or, as the case may be, such person shall also deposit a sum of Rs.1 lakh or such higher amount as may be prescribed, and such amount shall be refunded if the person proposed gets elected as a director or gets more than 25% of valid votes cast either on show of show of hands or on poll on such resolution.

The above notice period and deposit of sum shall not apply to Private Limited Companies.

Further, appointment of director need not be voted individually, that is, more than one director can be appointed via single resolution.

Private Limited Companies can buy-back its shares without reduction of share capital and redemption of preference shares

Section 67 restricts companies to buy-back its own shares except by way of reduction of share capital or redemption of preference shares. The said section shall not apply to private limited companies on the following conditions,

IF:

(a) a Body Corporate (includes Foreign Company, LLP) have not invested money in share capital of the Private Company,

(b) borrowing from Banks or Financial Institutions or any Body Corporate is less than twice the paid-up share capital or Rs.50 crores, whichever is lower, and

(c) such private company has not made any default in repayment of borrowing subsisting at the time of purchase of its own shares.

The exemption notification thus implies that, Private Companies can buy its own shares in addition to reduction of share capital or redemption of preference shares if it fulfils above three conditions.

Private Companies can accept deposit from its members

Private Companies can accept deposit from members subject to the provisions and Rules* if:

(a) amount of deposit from members does not exceed aggregate paid-up share capital and free reserves, and

(b) details of monies accepted as deposit from members is filed with the RoC.

Rules*

(i) Company issues circular in Form DPT-1 to its members.

(ii) Files DPT-1 with the RoC within 30 days before the date of issue to members.

(iii) Maintains 15% liquid asset of amount of deposit maturing during the financial year and the financial year next following and keeping it in a separate bank account with a scheduled bank to be called as Deposit Repayment Reserve Account.

(iv) Providing Deposit Insurance.

(v) Certifying that Company has not defaulted in repayment of Deposits or payment of interest thereon.

(vi) Securing deposit accepted from members by creating charge over assets of the Company, or where no charge is created, the deposits shall be called Unsecured Deposit and it shall be stated so in every circular, form, advertisement, etc.

With the announcement of exemption notification, Private Companies need not follow the rules prescribed under (i) to (v), however Rule (vi) has to be followed.

Resolution on Issuance of ESOP

Prior to the exemption notification, issuance of shares under ESOP required Special Resolution, but now Ordinary Resolution would suffice both in case of Private as well as Public Companies.

The answer to the question whether the Companies Act 2013 serves the purpose of its introduction in regard to ease of doing business in India and lesser compliance is though not a big Yes but certainly the answer would be in affirmative looking into the amendments and exemptions brought in by the present government for facilitating start-ups and growth of the economy as a whole.The exemption notification is one of the first big steps in facilitating start-up environment in the country. The industry, citizens of India, and the world at a large are looking optimistic to the coming days in respect of policies and new rules for Ease of Doing Business in India and Digital India.

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Category Corporate Law, Other Articles by - Niladree Chakraborty 



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