MCA initiates step to restore heydays for Private companies: issues draft notification for public comments

Ministry of Corporate Affairs published a “Draft Notification” on 24th June, 2014 which, by far if notified, will be of paramount importance and will restore the heydays for private companies. Clearing the air with respect to the same, the Ministry of Corporate Affairs published a draft notification on the inapplicability/ partial/modified applicability of certain provisions of Companies Act, 2013 to the Private Companies in exercise of powers under section 462 of Companies Act, 2013 which states as under:
Section 462 of The Companies Act, 2013 (relevant extracts):
(1) The Central Government may in the public interest, by notification direct that any of the provisions of this Act,—
(a) shall not apply to such class or classes of companies; or
(b) shall apply to the class or classes of companies with such exceptions, modifications and adaptations as may be specified in the notification.
The draft notification has been laid before both the Houses of Parliament as is required by the sub-section (2) of Section 462 of the Act, 2013. The Ministry has also published a notice inviting public comments on the draft notifications latest by 1st July, 2014.
A quick bird eye’s view of the sections, applicability whereof has been exempted, and/or modified has been covered hereunder
SrNo Chapter/ Section No/ Sub- section(s) in the Companies Act, 2013 Exceptions/ Modifications/ Adaptations Section Pertains to Implications in a Nutshell
1 Chapter IV, section 43 and section 47 [Both whole] Shall not apply Section 43: Kinds of share capital
The savings provided in Section 90 of Companies Act, 1956 is intended to be introduced.
Private companies are eligible to create and issue such other kind of share capital and on such other terms as may deem appropriate.
The restrictions on new issues of share capital and voting rights will no longer apply to private companies.
Section 47: Voting Rights
2 Chapter IV, clause (a) of sub-section (1) of section 62 and sub-section (2) of section 62 Shall apply with the following Modification:-Words ‘not being less than fifteen days and not exceeding thirty days’ shall be substituted with ‘not being less than seven days and not exceeding fifteen days’ Further issue of share capital
Private companies need to keep the rights issue offer open for a period of atleast 7 days and maximum of 15 days within which the existing shareholder as on the date of the offer and in receipt of the notice, shall be required to intimate his acceptance.
3 Chapter IV, clause (b) of sub-section (1) of section 62 Shall apply except that instead of special resolution, ordinary resolution would be required Further issue of share capital
The issue of Employees Stock Option Scheme by private companies will require approval by the shareholders of the company by passing an ordinary resolution.
4 Chapter V, sub-section (2) of section 73 Shall not apply to private companies having 50 or less number of members if they accept monies from their members not exceeding twenty five per cent of aggregate of the paid up capital and free reserves or one hundred per cent of the paid up capital, whichever is more, and which inform the details of such monies to the Registrar in the prescribed manner. Prohibition on acceptance of deposits from public
Sub-section (2) of Section 73 pertains to acceptance of deposits from members.
Private companies having 50 or lesser number of members can continue to accept deposits from members upto the maximum of the following :
o 25% of aggregate of paid up capital + free reserves; or
o 100% of the paid up capital
Details of such monies will be required to be informed to Registrar. Form DPT-3 pertaining to return of deposits may be required to be filed.
However, requirement to issue circular, maintain deposit repayment reserve, deposit insurance, providing security etc need not be complied with.
5 Chapter VII, sections 101 to 107 and section 109 [All whole] Shall apply unless – otherwise specified in respective sections or – unless articles of the private company otherwise provide. Section 101: Notice of meeting.
Exemption provided under Section 170 (1) of Companies Act, 1956 is intended to be restored.
The provisions shall continue to apply to private companies if in any particular section it has been specifically stated that the provisions of a particular section shall apply to private companies. Example – Section 103 (1) (b). Thus, where applicability of provision is specified in the section itself, the articles cannot modify or exclude the applicability. However, the Articles may impose a more strict requirement, example a Quorum of 5 members personally present in general meeting.
Subject to aforesaid, in case there are special provisions in the articles of such private companies which either partially modify the applicability of provisions of Sections 101 to 107 and Section 109 or completely exempt such companies from the applicability of aforesaid sections, then such provisions of the Articles shall prevail.
Thus, private companies can frame their regulations with respect to length of period of notice, demand for poll, chairman, proxy so long as it is not inconsistent with provisions of the Act.

Section 102: Statement to be annexed to the 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
6 Chapter X, Clause (g) of sub-section (3) of section 141 Shall not apply in respect of appointment of auditors by private companies. Eligibility, qualifications and disqualifications of auditors
A person who is in full time employment elsewhere is capable of being appointed as an Auditor in case of private company;
A person or a partner of a firm holding appointment as its auditor and holding appointment as auditor of more than twenty companies is capable of being appointed as auditor in a private company.
7 Chapter XI, section 160( Whole) Shall not apply Right of persons other than retiring directors to stand for directorship
The requirement of giving a special notice for appointment or proposing a person to be appointed as director by a member, alongwith a deposit of Rs. 1,00,000/- has been done away with for private companies.
8 Chapter XI, section 162 [Whole] Shall not apply Appointment of directors to be voted individually
Now private companies can appoint two or more directors at a general meeting by a single resolution only.
The requirement of voting for appointment of directors individually is no longer applicable on private companies.
9 Chapter XII, Section 180 Shall not apply to private companies having 50 or less number of members Restrictions on powers of the Board No approval of members are required, either by special resolution or ordinary resolution, to:o sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the companyo to invest in trust securities the amount of compensation received by it as a result of any merger or amalgamationo to borrow monies exceeding their net worth; and
o to remit, or give time for the repayment of, any debt due from a director.

10 Chapter XII, section 185 Shall not apply to 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”. Loans to Directors
Exemption to private companies from the restriction of giving loans and guarantees for loans taken to directors and other entities in which directors are interested.
However such exemption is only to private companies with borrowings of not more than Rs. 50 crores and in which there are no corporate shareholder.

11 Chapter XII, section 188 Shall not apply. Related Party transactions
This proposes to fully exempt private companies from Related Party Transactions (RPTs), irrespective of size. This means that they will not have to take any approval of either the Board or the general meeting for RPTs.
This may be a major relief, since the requirement of seeking approval of “majority of minority” would have been impossible for private companies.
It may be noted here that the erstwhile section 297 of the 1956 Act, corresponding to sec. 188, did not exempt private companies.
12 Chapter XIII, section 196, sub-section (4) and sub- section (5) Shall not apply Appointment of managing director, whole-time director or manager
Appointment and the terms and conditions of such appointment and remuneration of a MD / whole-time director / manager need not be approved at a Board or general meeting and by the Central Government in cases where the appointment is at variance to the conditions specified in Schedule III.
13 Chapter XIII, sub-section (3), section 203 Shall not apply Appointment of key managerial personnel
A whole time KMP of a private company can hold office in one more than one company at the same time.
The compliance required on appointment of managing director who is also a managing director or manager of other company is not applicable to private companies.
[The above post is contributed by CS Vinita Nair and CS Shampita Das at Vinod Kothari & Co. They can be contacted at [email protected] and [email protected] respectively]