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Privileges And Exemptions Available To Private Limited Companies

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.

  1. 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]
     
  2. 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.
     
  3. 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.

  1. 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.
     
  2. 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.
     
  3. 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).
  4. 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.
     
  5. 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]
     
  6. 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]
     
  7. 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.
     
  8. 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).
     
  9. 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]
     
  10. 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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