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The Companies Act, 2013 – Certain

privileges of private companies

withdrawn

Dr S. Chandrasekaran

Private company meaning

The Companies Act, 1956 (the Act of 1956) defines a

private company. It means a company which, by its

articles;

(a) Restricts the right to transfer its shares, if any;

(b) Limits the number of its members to fifty not

including:

(i) Persons who are in the employment of the company, and

(ii) Persons who, having been formerly in the employment of the

company, were members of the company while in that

employment and have continued to be members after

employment ceased; and

(c) Prohibits any invitation to the public to subscribe for any shares in, or

debentures of the company.

Provided that where two or more persons hold one or more shares, in a

company jointly, they shall, for the purposes of this definition, be treated as

a single member.

(d) Prohibits any invitation or acceptance of deposits from persons other

than its members, directors or their relatives:

Besides, a private company needs to have a minimum paid up capital of

rupees one lakh.

Modification of definition

The Companies Act, 2013 (the Act of 2013) modified the definition of

“private company”. In the Act of 1956, it was not part of definition clause,

whereas, in the Act of 2013 it is included in the definition clause.

Accordingly, the meaning of a private company is modified and reads as

under:

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“Private company” means a company having a minimum paid up share

capital of one lakh rupees or such higher paid up share capital as may be

prescribed, and which by its articles:

(i) Restricts the right to transfer its shares;

(ii) Except in case of One Person Company, limits the number of its

members to two hundred;

Provided that where two or more persons hold one or more shares in a

company jointly, they shall, for the purposes of this clause, be treated as a

single member.

Provided further that:

(A) Persons who are in the employment of the company; and

(B) Persons who, having been formerly in the employment of the

company, were members of the company while in that

employment and have continued to be members after the

employment ceased, shall not be include in the number of

members; and

(iii) Prohibits any invitation to the public to subscribe for any

securities of the company.

Effective changes in the Act, 2013

Now, the definition is part of definition clause in section 2 of the Act, 2013;

whereas, in the Act of 1956, the meaning was provided in section 3.

The maximum number of members has been increased from fifty to two

hundred. Further, the restriction to invite public to subscribe shares or

debentures has been extended to all types of securities.

Acceptance of deposits

The Act of 2013 prohibits acceptance of deposits from public. Now, a

company may, subject to the passing of a resolution in general meeting and

subject to such rules as may be prescribed in consultation with Reserve

Bank of India, accept deposits from its members on such terms and

conditions.

Therefore, provision by which a private company was permitted to accept

deposits besides members from its directors and relatives has been

withdrawn.

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Difference between private and public company:

There are inter alia, two major differences between a private company and a

public company. A private company can be incorporated with a minimum of

two shareholders; whereas, a public company requires a minimum of seven

shareholders. The second major difference is that a private company should

have at least two directors; whereas, the minimum number of directors for a

public company is three.

The concept of One Person Company is now introduced in the Act of 2013.

There being no such concept in the Act of 1956, several individual

entrepreneurs registered private companies with a second shareholder as

good as with one share only. Even to accommodate the second person just

spouse or relatives have been introduced as second shareholder. Similarly,

in order to comply with the minimum number of directors, the individual

entrepreneur admitted the second shareholder as a director on the Board of

such private company. In other words, most of the private companies are

one man show and the compulsion in the Act only made to have a second

shareholder as well as second director.

Privileges of a private company:

Several private companies are one man show. Besides, most of such private

companies are family managed companies. There being restriction on issue

of shares or debentures to public at large as well as restriction in transfer of

shares and all such private companies are generally small in size without

any public participation. Similarly, acceptance of deposits by a private

company also from very limited source and there is no dearth of fear for any

loss to public. The dividend payable, if any, is also within the limited

number of members of such private company. Therefore, the Act of 1956

contained several privileges for a private company from compliance of the

said Act. The major such privileges are loan to directors, related party

transactions to certain extent, non-application of provisions of loans and

investments and so on. Private companies are given so much of lenience

The concept of One Person Company is now introduced in the

Act of 2013. There being no such concept in the Act of 1956,

several individual entrepreneurs registered private companies

with a second shareholder as good as with one share only.

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and in particular for directors including payment of remuneration to them.

Pleasure of private companies withdrawn

The Act of 2013 has done away with the relaxation to private companies in

several provisions. The concept of “not applicable to private company” is no

more in existence in the Act of 2013. Such a move in the Act of 2013 has

taken away certain privileges enjoyed by private companies. The privileges

are of two types. One is for the directors and to their interest and the second

one is for the private company itself. The Directors were hitherto enjoying

certain pleasure from the application of certain provisions are now

withdrawn. Provisions relating to loan to directors in a private company was

not applicable in the Act of 1956 and now the corresponding provision in

the Act of 2013 does not provide such relief to directors. Section 185 deals

with loans to directors. It exempts the following loans only and directors in a

private company are no more in position of availing loans.

The providing of loans is not applicable to:

(a) the giving of any loan to a managing or whole-time director—

(i) as a part of the conditions of service extended by the company to all

its employees; or

(ii) pursuant to any scheme approved by the members by a special

resolution; or

(b) a company which in the ordinary course of its business provides loans or

gives guarantees or securities for the due repayment of any loan and in

respect of such loans an interest is charged at a rate not less than the bank

rate declared by the Reserve Bank of India.

Loans and investments

Section 372A of the Act of 1956 deals with loans and investments and the

provisions of section 372A are not applicable to private companies. The

corresponding section is 186 in the Act of 2013 which deals with loans and

investments. The exemption provided to a private company has been done

away and therefore, private companies are also under the strict compliance

of advancing loans or any investments, providing any guarantee or

extending any security etc.

Consent to act as director

The Act of 2013 now requires that every person who would like to become a

director in every company has to give his consent to act as director. Such

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consent is also required to be filed with Registrar within thirty days of

appointment.

Interested directors

Section 300 of the Act 1956 provides that interested directors not to

participate or vote in board’s proceedings. Private companies are exempted

from such provisions and now the corresponding section 184 in the Act of

2013 has done away such exemption.

Accordingly, an interested director of a private company cannot take part in

discussions or vote at the board meetings in any transaction in which he is

interested.

Provision related to appointment of managing/whole time director:

The Act of 1956 has certain conditions for appointment of managing

director, whole time director and manager in a public company. A public

company cannot appoint or employ at the same time a managing director

and a manager. The appointment of such managing director or whole time

director in a public company shall not exceed five years at a time. Besides,

some other conditions on the individuals are prescribed. Now, there being

no concept of exemption to private companies in the Act of 2013, all such

provision related to appointment of managing director, whole time director,

manager shall now also apply to a private company.

Appointment of directors to be voted individually

The resolution for the appointment of director is to be voted individually in a

public company. At a general meeting of a public company or a private

company which is subsidiary of a public company a motion for the

appointment of two or more persons as directors by a single resolution shall

not be moved. The Act of 1956 does not impose such condition for a private

company and now such privilege is withdrawn. The resolution at a general

meeting in a private company for appointment of director is to be voted

Section 300 of the Act 1956 provides that interested directors

not to participate or vote in board’s proceedings. Private

companies were exempted from such provisions and now the

corresponding section 184 in the Act of 2013 has done away

such exemption.

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individually.

Further issue of shares

The Act of 1956 does not require shareholders’ permission for further issue

of shares in a private company. A private company is having liberty to issue

shares to anyone other than the existing shareholders within the provisions

of its articles of association and restricting the total number of shareholders

to fifty. The Act of 2013 has done away from such exemption to private

companies. The provisions relating to further issue of capital will now be

applicable to all types of companies including private companies.

Besides, certain powers such as borrowings, sale of any part of the business

or any undertaking which can be exercised by the Board with the approval

of shareholders by a public company is also now applicable to private

companies.

In short, several provisions are now brought under the ambit of

shareholders democracy in a private company.

Role of company secretary

Private companies are now expected to comply with certain provisions like

public companies. The directors of a private company are also treated at par

with the directors of a public company. The directors in a private company

are expected to be well versed with all applicable provisions of the Act of

2013. The Act of 2013 introduced the concept of Key Managerial Personnel.

According to the new concept a Company Secretary is one of the Key

Managerial Personnel.

The primary function of an employed Company Secretary is to report to the

Board about the compliance with the provisions of the Act of 2013, the rules

made thereunder and other laws applicable to the company.

The draft Rules for appointment of Key Managerial Personnel is released by

the Ministry of Corporate Affairs on 20th September, 2013.

Accordingly, every listed company and every other company having a paid

up share capital of five crore rupees or more shall have whole time key

managerial personnel. Every private company having a paid up share

capital of five crore or more is required to appoint a Company Secretary who

is one of the key managerial personnel. Even private companies having less

amount of paid up share capital may avail the professional services of a

practising company secretary for better compliance of the Act of 2013.

(Dr S. Chandrasekaran is Senior Partner, Chandrasekaran Associates, Delhi)