A private company is theoretically positioned between a public listed company
and sole proprietorship. Being situated this way, it avails the benefits of
both-with the limited liability and separate entity characters of a corporate
structure, while retaining the characteristic concentrated control and
management of the sole proprietorship. The companies act, accordingly, provides
for several privileges and exemptions to private company due to its different
nature with respect to the other i.e. a public limited company.
This makes it a healthy choice for those looking to convert their present
business into a corporate structure or for startups without the hassles of
formation and management of public limited company. Below is the list of
peculiar privileges and exemptions available to private companies under the
Companies’ Act, 2013.
- Easier Formation
Under the Companies’ Act 2013, a private limited company is relatively easier to
form than a public limited company. A mere two persons can form a private
company as opposed to the requirement of seven or more persons for a public
company [i].
Ps The requirement of a minimum share capital has been omitted, for both the
forms of companies, by an amendment (which was effectuated from 25.05.15)[ii].
Before this, private companies had a lesser minimum threshold for share capital
than a public company.
Similarly, the statutory exemption from obtaining the certificate of
commencement was also amended to remove the requirement of certificate of
commencement uniformly. [iii]
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- Lesser Hassle during Issue of Shares
A private company, while issues further capital, does not have to make a
prospectus or submit a statement in lieu of this prospectus to the Registrar of
companies. A prospectus and Registrar’s permission is requisite for a public
company which can make public offers to wider and more populous segment of
potential investors. Since a private company does not have the capability of
making a public offer[iv], it is exempted from this requirement.
A private company also has the privilege of providing direct or indirect
financial assistance to the buyers. This is prohibited for public company.[v]
To exemplify, this entails the possibility of providing financial guarantee to a
loan taken to facilitate the borrower for the purchase of the company’s shares.
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- Regarding Directors
A private company has the privilege of having as less as two directors as
opposed to the requirement of seven for a private company.[vi] In a corporate
structure, directors represent the interest of the shareholders. Since a private
company has lesser number of shareholder (maximum of 200) than a public company
(unlimited shareholders), the number of directors required is kept lesser. These
directors need not retire by rotation at the annual general meetings either.[vii]
It is also permissible for a private company to have a director that is holding
a directorship in 19 other companies, making a total of 20 directorship possible
for a person as opposed to ten for a public company. [viii]
In addition to these few, there were several other significant privileges and
exemptions available to private companies emanating from the Companies Act 1956
which were not included in the 2013 Act. The introduction of the new Act,
therefore, raised several concerns. Pursuant to these concerns, the Ministry of
Corporate Affairs issued notifications (dated 5th June, 2015 and 13th June,
2017) for exemption of private companies from several requirements in the new
Act.
Following are some of the significant effects of these exemption
notifications.
- Easier Receipt of Deposits from Members
A private company may accept deposits from it members, as long as such deposits
do not exceed the total of the paid-up capital, security premium and the free
reserves, without following the extensive procedure laid out in section 73 (2)
of the Act.[ix]
A private company, not being an associate or a subsidiary, which has not taken
loan of more than twice its share capital or fifty crores (whichever is lower)
from banks or financial institutions are also exempted from such strenuous
procedure as long as it has not defaulted on such loans.
However, such deposits have to be mandatorily informed to the registrar.
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- Less Revealing Auditor’s Report
For a small private company or a one-person private company, the auditor’s
report does not have to include the company’s financial control systems and the
effectiveness of the same.[x] The same exemption is also given to a private
company which has a turnover of less than 50 crores (according to the most
recent auditor’s report) or one which has institutional borrowings amounting to
less than twenty-five crores.
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- Fewer Board Meetings
The exemption from necessarily holding a minimum of four board meetings is now
extended to private start-up companies[xi]. Adding to the list of one-person
company, small company and a dormant company in section 173 (5), a private
start-up shall also hold only one meeting in both halves of a year (with a gap
of 90 days).
- Participation of Interested Directors in Quorum
An interested director may, pursuant to this exemption, form part of the quorum
after full disclosure of his interest.[xii] This in effect also reduces the
possibility of dismissal of a board meeting for want of quorum.
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- Exemption from Rotation of Auditors
Private companies which have a paid-up share capital of less than 50 crores do
not have to mandatorily change the auditors after every two shift (ten
years). [xiii] This limit has been raised from the earlier bar of 20 crores to
extend the exemption to private companies with paid-up capital of up to 50
crores.
Furthermore, the section 141 (3) (g), which restricts the appointment of a
person as an auditor if he/she audits more than 20 companies, has been removed
for private companies whose share capital is less than one thousand
million.[xiv]
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- Possibility of Transaction with Certain Related Parties
The definition of “related party†for private companies does not include holding
companies, subsidiary companies, associated companies and subsidiaries of the
holding company of the private subsidiary.[xv] This exemption entails the
possibility of transaction with these parties which is otherwise prohibited
under section 188 of the Act.
Furthermore, such related parties can also vote in board meetings, unlike the
restriction on them in public companies.[xvi]
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- Option of Buying One’s Shares
Certain private companies are exempted from the restriction on the purchase of
shares by the company itself[xvii]. Exemption is provided to those private
companies in whose shares no other body corporate has invested and which has not
taken any loans (from banks, financial institutions or other corporate source)
of more than double its share capital or 500 million, whichever is lower. The
exemption is not applicable if the company has defaulted on such loans.
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- Possibility of Extension of Loans to Directors
Certain private companies may extend loans to directors or their related
parties[xviii] as against a public company which is restricted to do
so.[xix] The companies that qualify for this exemption need to satisfy the same
criteria as of the preceding point (no. 7).
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- Relaxation of Rules regarding Share Capital and Issue
In the matter of the issue of shares or debentures with differential voting or
dividends, a private company does not have to comply with any statutory
regulations if its charter documents so provide[xx]. In other words, the
stringent requirements of section 43 and 47 can be bypassed by the private
companies through their AoA or MoA. This would allow such companies to raise
capital more easily and without medaling with a particular voting ratio.
The provision for issue of shares under the employee stock option is more
relaxed for the private companies which only requires an ordinary resolution, as
opposed to a special resolution needed for a public limited company.[xxi]
Also, if 90% of the shareholders’ consent, then the time period of notice for
right’s issue may be changed or reduced from the prescribed period of 15 to 30
days mandated under section 62 of the Act.[xxii]
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- Wider Board Power
Private companies are exempted from the restrictions placed on the powers of the
Board of directors in section 180 of the Act.[xxiii] This opens up diverse range
of monetary powers at the disposal of the board of directors.
Furthermore, private companies are exempted from mandatory filing of the board
resolutions to the registrar of the companies regarding matters set in section
179 (3) of the Act, thereby reducing the time taken for execution of such
resolution.
In light of these exemption, a private company has to comply with lesser
stringent rules and regulations that a public limited company is subject to
under the Companies Act.
End-Notes:
[i] The Companies Act 2013, s 3 (1) (b)
[ii] The Companies (Amendment) Act 2015, s 2 (1)
[iii] Ibid, s 4
[iv] The Companies Act 2013, s 23 (2)
[v] Ibid, s 67 (2)
[vi] Ibid, s 149 (1) (a)
[vii] Ibid, s 152 (6); note: sub-section only talks about public company.
[viii] Ibid, s 165 (1)
[ix] Ministry of Corporate Affairs, Government of India, Notification dated
13th June, 2017
[x] Ibid
[xi] Ibid
[xii] Ministry of Corporate Affairs, Government of India, Notification dated
13th June, 2017
[xiii] Ibid
[xiv] Ibid
[xv] Ministry of Corporate Affairs, Government of India, Notification dated
5th June, 2015, serial no. 1
available at
URL: http://www.mca.gov.in/Ministry/pdf/Exemptions_to_private_companies_05062015.pdf
last seen on: 12/12/2107
[xvi] Ibid, serial no. 15
[xvii] Ibid, serial no. 5
[xviii] Ibid, serial no. 14
[xix] Companies Act 2013, s 185
[xx] Ministry of Corporate Affairs, Government of India, Notification 5th June,
2015, serial no. 2
[xxi] Ibid, serial no. 4
[xxii] Ibid, serial no. 3
[xxiii] Ibid, serial no. 12
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