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Draft exemption notifications on private limited company

CA Nitesh Kumar More 
on 05 December 2014

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 1. Comments: In case of Private Ltd Companies, its holding, subsidiary or an associate company or other subsidiary of its holding company will not be treated as related party. 

Chapter I, sub-clause (viii) of clause (76) of section 2 shall not apply to Private Ltd Company with respect to sec 188.

Text of Sec. 2(76) is reproduced below: Section 2(76) “related party”, with reference to a company, means—

(viii) 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. 

2. Comments: In case of Private Ltd Companies, section 43 (Kinds of Share Capital) and section 47(Voting Rights)  shall not be applicable only if MOA or AOA provides that section 43 & section 47 will not be applicable. 

Chapter IV, section 43 (Kinds of Share Capital) and section 47 (Voting Rights) shall not apply where memorandum or articles of association of the private company so provides.

Text of section is reproduced below :

Sec 43: Kinds of share capital :The share capital of a company limited by shares shall be of two kinds, namely:—

(a) equity share capital—

(i) with voting rights; or

(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and

(b) preference share capital:

Provided that nothing contained in this Act shall affect the rights of the preference shareholders who are entitled to participate in the proceeds of winding up before the commencement of this Act.

Explanation.—For the purposes of this section,—

(i) ‘‘equity share capital’’, with reference to any company limited by shares, means all share capital which is not preference share capital;

(ii) ‘‘preference share capital’’, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to—

(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and

(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company;

(iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:—

(a) that in respect of dividends, in addition to the preferential rights to the amounts specified in sub-clause (a) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid;

(b) that in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in sub-clause (b) of clause ( ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid.

Sec 47: Voting rights.: (1) Subject to the provisions of section 43 and sub-section (2) of section 50,—

(a) every member of a company limited by shares and holding equity sharecapital therein, shall have a right to vote on every resolution placed before the company;and

(b) his voting right on a poll shall be in proportion to his share in the paid-up equity share capital of the company.

(2) Every member of a company limited by shares and holding any preference share capital therein shall, in respect of such capital, have a right to vote only on resolutions placed before the company which directly affect the rights attached to his preference shares and, any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital and his voting right on a poll shall be in proportion to his share in the paid-up preference share capital of the company:

Provided that the proportion of the voting rights of equity shareholders to the voting rights of the preference shareholders shall be in the same proportion as the paid-up capital in respect of the equity shares bears to the paid-up capital in respect of the preference shares:

Provided further that where the dividend in respect of a class of preference shares hasnot been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company 

3. Comments: In case of Private Ltd Companies, if 90% of members gives consent, right offer may specify a time less than 15 days(instead of 15 days to 30 days) from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined. 

Chapter IV, Section 62(1)(a)(i) and (2) shall apply with following modifications:-
 

In clause (a), in sub-clause (i), the following proviso shall be inserted, namely:-
 

Provided that notwithstanding anything contained in this sub-clause and sub-section (2) of this section, in case ninety per cent, of the members of a private company have given their consents in writing or in electronic mode, the periods lesser than those specified in the said sub-¬clause or sub-section shall apply.

Text of section is reproduced below :

Section 62- Further issue of share capital          

1. Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered—

(a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:—

(i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be despatched through registered post or speed post or through electronic mode to all the existing shareholders at least three days before the opening of the issue.

4.  Comments: In case of Private Ltd Companies, ESOP can be issued by passing AN ORDINARY RESOLUTION instead of a special resolution.

Chapter IV, Section 62(1)(b): In clause (b),for the words “special resolution”, the words “ordinary resolution” shall be substituted.

Section 62(1)(b)- Further issue of share capital

1. Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered

(b) to employees under a scheme of employees’ stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed.

5. Comments: A private ltd company, if it fulfills certain conditions can purchase its own shares without any requirement of reduction of share capital.

Chapter IV, Sec 67- Restrictions on purchase by company or giving of loans by it for purchase of its shares.

Section 67(1) - No company limited by shares or by guarantee 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 this Act.

Sec 67(1) shall not apply to private companies subject to following conditions-
 

(a) in whose share capital another 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 fifty 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.

6. Comments: Sec 101 to 109(except sec 108) relating to Board Meeting shall not be applicable for private Ltd companies unless otherwise specified in respective sections or the articles of the company provide otherwise.

Chapter VII:

Section 101- Notice of meeting. 
Section 102- Statement to be annexed to notice. 
Section 103- Quorum for meetings. 
Section 104- Chairman of meetings. 
Section 105- Proxies. 
Section 106- Restriction on voting rights. 
Section 107- Voting by show of hands. 
Section 109- Demand for poll

Above sections shall not apply to private companies unless otherwise specified in respective sections or the articles of the company provide otherwise.

7. Comments: Private Ltd companies will not be required to file about 20 resolutions. This exemption was not provided in the draft notification issued for public comments on 24/06.

 Chapter VII, clause (g) of sub-section (3) of section 117 shall not apply to private companies

Text of section is reproduced below:

Section 117- Resolutions and agreements to be filed.

(3) The provisions of this section shall apply to—

(g) resolutions passed in pursuance of sub-section (3) of section 179; and

8. Comments: Audit of one person companies, dormant companies, small companies, and private companies having paid-up share capital less than one hundred crore rupees will not be counted for calculating limit of 20 company audit.

Chapter X, Section 141(3)(g) shall apply to private companies  with the modification that the words "other than one person companies, dormant companies, small companies, and private companies having paid-up share capital less than one hundred crore rupees” shall be inserted after the words “twenty companies”.

Text of section is reproduced below:

Section 141- Eligibility, qualifications and disqualifications of auditors. -

(3) The following persons shall not be eligible for appointment as an auditor of a company, namely:—

(g) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies;

9. Comments: Any person will not have any right to stand for directorship of private companies by giving a notice to company.

Chapter XI: Section 160- Right of persons other than retiring directors to stand for directorship shall not apply to private companies

Text of section is reproduced below:

160. (1) A person who is not a retiring director in terms of section 152 shall, subject to the provisions of this Act, be eligible for appointment to the office of a director at any general meeting, if he, or some member intending to propose him as a director, has, not less than fourteen 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, the intention of such member to propose him as a candidate for that office, along with the deposit of one lakh rupees or such higher amount as may be prescribed which shall be refunded to such person or, as the case may be, to the member, if the person proposed gets elected as a director or gets more than twenty-five per cent. of total valid votes cast either on show of hands or on poll on such resolution.

(2) The company shall inform its members of the candidature of a person for the office of director under sub-section (1) in such manner as may be prescribed.

10. Comments: Appointment of directors of private company need not to be voted individually.

Chapter XI: Section 162- Appointment of directors to be voted individually: shall not apply to private companies

Text of section is reproduced below:

162. (1) At a general meeting of a company, a motion for the appointment of two or more persons as directors of the company by a single resolution shall not be moved unless a proposal to move such a motion has first been agreed to at the meeting without any vote being cast against it.

(2) A resolution moved in contravention of sub-section (1) shall be void, whether or not any objection was taken when it was moved.

(3) A motion for approving a person for appointment, or for nominating a person for appointment as a director, shall be treated as a motion for his appointment.

11. Comments: There is no restriction on power of Board of a private company as provided by sec 180.

Chapter XII :Section 180- Restrictions on powers of Board: shall not apply to private companies

Text of section is reproduced below:

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.

Explanation.—For the purposes of this clause,—

(i) “undertaking” shall mean an undertaking in which the investment of the company exceeds twenty per cent. of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which generates twenty per cent. of the total income of the company during the previous financial year;

(ii) the expression “substantially the whole of the undertaking” in any financial year shall mean twenty per cent. or more of the value of the undertaking as per the audited balance sheet of the preceding financial year;

(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:

Provided that the acceptance by a banking company, in the ordinary course of its business, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of monies by the banking company within the meaning of this clause.

Explanation.—For the purposes of this clause, the expression “temporary loans” means loans repayable on demand or within six months from the date of the loan such as short-term, cash credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal character, but does not include loans raised for the purpose of financial expenditure of a capital nature;

(d) to remit, or give time for the repayment of, any debt due from a director.

(2) Every special resolution passed by the company in general meeting in relation to the exercise of the powers referred to in clause (c) of sub-section (1) shall specify the total amount up to which monies may be borrowed by the Board of Directors.

(3) Nothing contained in clause (a) of sub-section (1) shall affect—

(a) the title of a buyer or other person who buys or takes on lease any property,investment or undertaking as is referred to in that clause, in good faith; or

(b) the sale or lease of any property of the company where the ordinary business of the company consists of, or comprises, such selling or leasing.

(4) Any special resolution passed by the company consenting to the transaction as is referred to in clause (a) of sub-section (1) may stipulate such conditions as may be specified in such resolution, including conditions regarding the use, disposal or investment of the sale proceeds which may result from the transactions:

Provided that this sub-section shall not be deemed to authorise the company to effect any reduction in its capital except in accordance with the provisions contained in this Act.

(5) No debt incurred by the company in excess of the limit imposed by clause (c) of sub-section (1) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded.

12. Comments: In case of a private ltd company, the interested director may participate in such meeting after disclosure of his interest.

Chapter XII, Section 184(2) shall apply to private companies ALSO. However, the interested director may participate in such meeting after disclosure of his interest.

Text of section is reproduced below:

Section 184- Disclosure of interest by director.

(2) Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into—

(a) with a body corporate in which such director or such director in association with any other director, holds more than two per cent. shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or

(b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be, shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in “such meeting”:

Provided that where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested.

13. Comments: In case of a private ltd company, marginal relief from application of sec 185 has been given.

Chapter XII,Section 185- Loan to directors, etc shall not apply to following types of Private companies- 

(a) which have borrowings from banks or financial institutions or any bodies corporate not more than twice of their paid up share capital or Rs. 50 crore, whichever is lower; and 

(b) in whose share capital no other body corporate has invested any money

14. Comments: In case of a private ltd company, interested shareholders/members can vote , even if he is a related party.

2nd proviso to Section 188(1) shall not apply to  Private companies

Text is reproduced below:

Provided further that no member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.

15. Comments: In case of a private ltd company, appointment of MD/WTD etc shall not  require any approval of general meeting & Central Govt.

Chapter XIII, Section 196(4) & (5) shall not apply to  Private companies

Text is reproduced below:

Section 196- Appointment of managing director, whole-time director or manager.

(4) Subject to the provisions of section 197 and Schedule V, a managing director, whole-time director or manager shall be appointed and the terms and conditions of such appointment and remuneration payable be approved by the Board of Directors at a meeting which shall be subject to approval 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 that Schedule:

Provided that a notice convening Board or general meeting for considering such appointment shall include the terms and conditions of such appointment, remuneration payable and such other matters including interest, of a director or directors in such appointments, if any:

Provided further that a return in the prescribed form shall be filed within sixty days of such appointment with the Registrar.

(5) Subject to the provisions of this Act, where an appointment of a managing director, whole-time ger is not approved by the company at a general meeting, any act done by him before such approval shall not be deemed to be invalid.  


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