PUNE CHAPTER WIRC OF ICSI

25 JULY 2015

CS SACHIN BHAGWAT

EXEMPTIONS TO PRIVATE COMPANIES

“Counsel have drawn our attention to the extremely unsatisfactorily drafting of this Act and we must confess that many of its provisions do not suffer from lucidity. We have been told that the new Act has raised many problem for those who have anything to do with the management or running of companies, and the problems brought before us are only a few of those which have arose in practice.......

......It seems to us unfortunate that a law which is intended to help in the development of companies in our country and also to put down abuses which were noticed in the working of companies ….. should not have been couched in clear and more precise language. That, however, is a matter for Parliament. Our concern is to take the law as we find it and do the best we can.” [Chagla J. in Ramanben Thanawala v Jyoti Ltd. (1957) 27 CompCas 105 ]

Clause 2

“The Private companies, while complying with such exceptions, modifications and adaptations…. shall ensure that the interests of their shareholders are protected.”

Notification 464 (E) – 5 June 2015

Sub-clause (viii) of Clause (76) of Sec 2 shall not apply with respect to section 188. Second

Proviso to Section 188(1) shall not apply

Transactions of a Private company with Holding company / subsidiary / associate company / co-subsidiary outside the purview of related party transactions u/s 188

The Related Party permitted to vote on “Non-OCB and Non-AL” transactions with the Private Company exceeding threshold limits

Sec 2(76)(viii) – Related Parties

A Private company can without any consent or approval, enter into prescribed transactions with its Holding company / subsidiary / associate company / co-subsidiary even if such transactions are not in OCB or at AL

In respect of transactions of a private companies with ‘other related parties’, not in OCB and AL, the related party concerned is entitled to cast vote at the general meeting

Effect of exemption – Related Parties

Sec 43 shall not apply where Memorandum or Articles so provide

Private company can define ‘Kinds of share capital’ to suit its needs – “Status quo ante” restored

Need not comply with the Rules prescribed for issue of shares with differential rights

Should a private company include specific clause in its Memorandum OR Articles to specify that Sec 43 shall not apply? If so, what type of amendment can be made to the Memorandum?

Section 43 - Kinds of Share Capital

Will it suffice if the Articles state that Sec 43 shall not apply? - NO

Company needs to specifically define the Kinds of Share Capital in the Articles

Private company can have Share capital to suits its needs – Example - 0% Preference shares OR NO preference as to dividend but with respect to repayment of capital possible

Section 43 - Kinds of Share CapitalContd..

Sec 43 shall not apply where Memorandum or Articles so provide

Need to include specific clause in the Memorandum OR Articles to specify that Sec 47 shall not apply?

If so, what type of amendment can be made to the Memorandum?

Section 47 - Voting rights

Will it suffice if the Articles state that Sec 47 shall not apply? - NO

Necessary to define voting rights of the classes of shareholders

Possible to have EQUAL voting rights for all classes of shares or disproportionate voting rights for different classes

Section 47 - Voting rights ..contd

90% members’ consent required

Offer acceptance period can be less than 15 / 30 days

Offer can be dispatched less than 3 days before

opening of issue

Further issue of capital - Sec 62(1)(a)(i) and (2)

Consent to be obtained in “WRITING” or “IN ELECTRONIC MODE”

Exemption from sub-sec (2) is limited to the time specified; NOT the MODE of dispatch of offer letter. Hand delivery / Courier not permitted

Can the consent be obtained after dispatch of the Offer letter?

Impact - Section 62(1)(a)(i) and 2 ..contd

Issue of further shares to Employees pursuant to ESOPs by ORDINARY instead of SPECIAL resolution

Is an offer of shares to Employees pursuant to ESOP a Private placement u/s 42? If yes, Sec 42 requires Special Resolution.

Sec 62(1)(b) - ESOPs

Purpose of exemption to specified private companies not clear because Sub-sec (2) does not apply to private companies.

Sub-sec (1) puts restrictions on buying own shares unless share capital is reduced as per the Act, which is anyway not required due to the “non obstante clause” in Sec 68

Context vis-à-vis Sec 77 and 77A of CA 1956

Section 67 – Purchase of own shares

Exemption is specific to compliance of Conditions in clauses (a) to (e) only

Private companies permitted to accept deposits from members upto 100% of paid up share capital and free reserves

Company to file the details of money accepted with the Registrar in such manner as may be prescribed

Section 73(2) – (a) to (e) – Deposit from Members

Exemption does not extend to sub-sec (2), it is limited to the following:

◦ Not to issue and file Circular (DPT-1) with ROC

◦ Not to deposit specified percentage of deposits maturing in bank account (DRR Account)

◦ Not to provide deposit insurance◦ Not to certify “No default” in repaying

deposits or interest thereon

Deposit from Members.. contd

Compliance required to be done u/s 73(2)

◦ Pass a special resolution

◦ Period of deposits cannot be less than 6 months and more than 3 years

◦ Deposits less than 3 months restricted to 10% of aggregate of paid up share capital and free reserves

◦ Rate of interest restricted as specified in the Rules

◦ Can the terms of deposits be altered to the prejudice of deposit holders?

◦ Deposit application form mandatory, which contains a declaration that the deposit is not being made out of borrowed monies

◦ Deposit receipt to be issued. Deposit Register to be maintained

◦ Deposit Return to be filed

Deposit from Members.. contd

Private company can provide in the Articles its own Rules for issuing notice of general meetings. status quo ante restored.

Exemptions: - Mandatory notice of 21 days

- Consent for short notice of 95% of members- Notice to legal representative of a member / auditor/ directors

Sec 101 – Notice of meeting

Articles must contain express provision for availing exemption – status quo ante restored

No need to annex Explanatory Statement

Sec 102 - Explanatory Statement

Articles must contain express provision for availing exemption – status quo ante restored

Such companies can provide in its Articles that a person present through proxy shall be counted for quorum

Sec 103 - Quorum

Articles must contain express provision for availing exemption – status quo ante restored

Freedom to have provision in Articles regulating proxies such as Proxies can speak at the meeting and can vote on show of hands

Sec 105 - Proxies

Articles must contain express provision for availing exemption – status quo ante restored

Articles may contain a provision that sense of the meeting can be ascertained only by Poll

Sec 107 - Voting by show of hands

Articles must contain express provision for availing exemption – status quo ante restored

Articles may provide a higher threshold for demanding Poll

Sec 109 - Demand for Poll

Board Resolutions passed under Section 179 (3) and under Rule 8 of relevant Rules to be filed with Registrar

Caution: Need to file resolution of appointment of a Managing Director [See Sec 117(3)(c)]

Section 117(3)(g) – Board resolutions filing with ROC

Number of companies of which a person or partner of a firm can be an auditor

Freedom to be an Auditor in - OPCs, dormant, small companies and private companies having paid up share capital less than 100 crore – without restriction on the number

Section 141(3)(g) - Audit

Right of persons to stand for directorship

Huge relief for private companies in terms of mandate of deposit to be kept.

Section 160

No special resolution needed to sell undertaking, invest otherwise in trust securities the amount received on merger, borrowing in excess of paid up capital and free reserves or to give time to a director to repay debt

No need to bother about determination of what is an “undertaking”

Section 180 – Powers of Board

An ‘interested director’ of a private company is permitted to participate in the meeting if he makes disclosure of his interest or concern in the contract at the meeting.

Can such Director ‘Vote’ on the resolution?

Section 184(2) – Participation of Interested Director

Restrictions of giving of loan, guarantee or security to any specified person do not apply to the following Private companies only:

- No body corporate has invested in the share capital

- If the private company’s borrowings from Banks / FIs or any body corporate is less than LOWER of its paid up capital and Rs. 50 Cr.

- If the Private company has no default in repayment of such borrowings subsisting at the time of making transaction

Section 185- Loans

Private companies exempted from the following approvals:

Board and Shareholders approval Central Government approval if the

conditions of Schedule V are not fulfilled

However, the term of appointment prescribed in sub-sec (2), Age limits prescribed in sub-sec (3) will have to be adhered to

Section 196 (4) & (5) – Appointment of MD/WTD/Manager

Common Seal: Made optional

“So far as the question of putting up of the seal of the Company is concerned, it is a relic of the days when mediaeval barons, who could not read or write, used their rings to make a characteristic impress. Even in absence of a seal, the Company may still be held to be liable having regard to the nature of transaction and the authority of those who had executed it.” [Supreme Court – (2006) Comp Cas 131 (577)]

Suggestion: Board should authorise two Directors or any Director and Company Secretary to authorise any person to execute other deeds as the Company’s attorney.

Companies (Amendment) Act 2015

Section inserted to provide for penalty for contravention of provisions relating to Deposits

Provision prospective. Any violations of Sec 73 or 76 between April 1, 2014 and May 25, 2015 shall NOT attract penalty prescribed under Sec 76A

Section 76A – Penalty provided

Mandatory setting off of carried over previous losses and depreciation not provided in previous years before declaring dividend

This was provided under Rule 3(5) of Companies (Declaration and Payment of Dividend) Rules 2014 which has was deleted on 29 May 2015

Sec 123 – set off provision added

Companies are exempted from obtaining approval of shareholders if the transactions prescribed in sub-sec (1) are between holding company and its wholly owned subsidiary.

No relevance for Private companies as subsidiaries are not “related parties” with reference to a private company

Sec 188 – Related Party transaction

Thank you !