Tuesday, June 9, 2015

Private Companies will heave a sigh of relief as MCA has relaxed restrictive provisions of Companies Act, 2013


The Ministry of Corporate Affairs (‘MCA’) does away with certain restrictive provisions for private companies vide notification no. F.NO.2/11/2014-CL.V . The MCA has provided exemption to private companies from filing board resolution to Registrar of Companies. It further eased out provisions relating to related party transactions, loans to directors and norms on further issue of share capital. These amendments were much needed as many restrictive provisions were applicable on Private companies which rendered them helpless to carry on day-to-day business activities. The Key changes brought out for private companies are as under:

1)Exemption from filing board resolutions: As per Section 179(3) of companies Act, 2013 companies are required to file certain items of Board Resolutions with the Registrar of Companies in the form called MGT 14. Now this requirement has been done away with for private companies. Thus, now private companies need to file form MGT 14 only in case of special resolutions. This has been one of the major relaxations provided by MCA for private companies.

2)Loan to directors by private companies: Provision relating to loan to directory provides that no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.

Under amended norms, a partial exemption has been granted to private companies giving a loan, providing a guarantee or offering a security in connection with a loan taken by a director. The partial exemption provides that:

(a) There should not be any shareholding of body corporate in the lending/guaranteeing company;

(b) The lending company’s aggregate borrowings from other bodies corporate or banks or financial institutions is limited to lower of (i) 2 * (net worth)of company; or

(ii) Rs 50 crores

(c) There is no pending default in repayment of such borrowings by the lending company.

It may be noted that the restriction on lending by private companies was not there under the Act 1956

3)Relaxation of ceiling on company audits: The ceiling of 20 audits will now exclude one person companies, dormant companies, small companies, and private companies having a paid up share capital of less than Rs. 100 crores.

4)Related Party transactions (RPTs): One of the special features of general meeting approval in case of RPTs is that the resolution has to be approved by a vote of the minority only. Related parties are not allowed to vote on such resolution. This provision has been removed for private companies.

Further, holding-subsidiary relationship and investor-associate relationships have been excluded from the definition of “Related Parties”. Such change will definitely ease the related party transactions.

5)Further issue of shares: Now, issue of further shares to employees of private companies under scheme of Employee Stock Options (‘ESOPs’) can be done by passing an ‘ordinary resolution’ instead of ‘Special Resolution’. Requirement of sending the notice three days prior to opening of the issue by way of specified means under rights issue has now been exempted. Provision with regard to time period of offer in case of rights issue have also been exempted for private companies.

6)Loans against its own securities: Section 67 prohibits companies from providing loans against its own shares. Now, private Companies have been exempted from the provision of section 67, subject to the following conditions:

a)Where no other body corporate has invested any money.

b)Borrowing from banks, FIs or body corporates is less than double of its paid up capital of Rs. 50 crore, whichever is lower.

c)The above qualifying private company should not have defaulted in repayment of borrowings as may be existing on the date of the transaction under the section.

7)Participation of interested director in board meeting: Section 184(2) provides that the directors of a private company should abstain themselves from participating in a board meeting where a matter in which they are interested is to be discussed. However, under the amended provisions, an interested director of a private company can participate in the board meeting after declaring his interest.

8)Voting rights and kinds of share capital: Now the provisions relating to voting rights and Share Capital are not applicable to private companies unless their MoA or AoA provides for the same.

9)Right of persons other than retiring directors to stand for directorship: Provisions of section 160 shall not apply in case of private companies. Similar was the position under section 257 of the Act 1956.
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