Friday, 25 July 2014

Private Limited Companies


This note broadly covers the main areas that have an impact on the functioning of the Private Limited Companies. It outlines the immediate (major) actions that have to be taken by a private limited company, to be compliant with the new provisions. It also gives a comparative analysis on the position of a private limited company under the previous Companies Act 1956 and the Companies Act 2013.

Although the Ministry has come out with few proposed privileges as they are yet to be notified we’ll not bring that in this note. However the proposed privileges are attached along with this note for your information/ reference.

The immediate actions that have to be taken up by Private Limited Companies:

1.     As you all know, pursuant to Sec 12(3)(c) of the Companies Act 2013 we’ll have to provide all the following information on all our letter head, billheads, letter papers and notices and other official publications

Name of the Company, - Registered Office Address, - Corporate Identification Number, - Telephone No, - Fax No. (if any), - e-mail address, - Website address

Questions: what are covered under official publications? Are internal circulars even covered under these???

2.     Disclosure of Interest: The disclosures have to be obtained in form DIR -8 and MBP 1. A Board resolution has to be passed taking note of these disclosures and filed with the ROC within 30 days from the date of passing the resolution (form MGT 14).

Under the CA 2013, private companies are free to include such other additional disqualifications as may be laid down by them in addition to the ones said in Sec 164 (1) and (2) of companies act 2013.

Note: if the company has any independent director then obtain a declaration of independence u/s 149(6) of the CA 2013.

A detailed write up on the above is available in the below link:

3.     Borrowings: Earlier there were no restrictions on the borrowings of a Private Limited Company. However, currently the company is to comply with the following requirements for borrowing in excess of 100% of paid up capital and free reserves of the Company:

a.     A prior board approval and shareholder’s approval is required.
b.    The board resolution has to be filed with the ROC within 30 days from the date of passing the resolution and
c.     The special resolution has to be filed within 30 days with the ROC.

-       The resolutions should specify the maximum limit upto which the company can borrow.

-       The loans borrowed from directors, be it unsecured loans/ secured loans shall now be considered for determining the limit of borrowings under Sec 180(1)(C).

4.     Re- appointment of Managing Director: Normally in private limited companies the managing director is a Non Rotational Director. However, now there is a restriction on the periodicity of the managing director as follows:

Sec 196 (2) No company shall appoint or re-appoint any person as its managing director, whole-time director or manager for a term exceeding five years at a time:

Provided that no re-appointment shall be made earlier than one year before the expiry of his term.

Note: as a continuous process MD has to be re-appointed during the 5th year for him to continuously hold the position as a managing director.


a.     His re-appointment has to be approved by the directors and the shareholders
b.    The board resolution and the special resolution have to be filed with the ROC within 30 days.

Therefore ROC enjoys two filing fee for the same form MGT 14 being filed twice.(One for BR and the other for Spl. Resolution)  
5.     Deposits:

Deposit is defined to include any receipt of money by way of deposit or loan or in any other form, but does not include such amounts as may be prescribed.

Earlier private limited companies were permitted to borrow from their shareholders also, but now, that door is closed and they are permitted to accept loans or deposits only from Directors, if required.

Let us talk a little bit more on this with regard to the gold saving schemes:

a.     Private limited companies are not permitted to run these schemes if it is in non compliance with the act.
b.    Meanwhile it is said that the return on these schemes cannot be higher than the bank rate.
c.     DPT 4 – Return of deposits to be filed by August 31, 2014.
A detailed write up is available in the below link:

6.     Related Party Transaction: all contracts including contracts on immovable property which were excluded by the earlier act have been brought into the ambit of the Companies act 2013.

Question: does it include the loans taken from the directors also? If so, does it include even the unsecured loans.?

We have written a detailed note on this. The link for the same is as follows:

7.     Resident Director: All the companies to appoint atleast one resident director
8.     Compliance of Secretarial Standards: The secretarial standards have to be complied with, with regard to the minutes of Board and Annual General Meeting.

9.     DIN: Section 158 – Obligation to indicate Director Identification Number

Every person or company, while furnishing any return, information or particulars as are required to be furnished under this Act, shall mention the Director Identification Number in such return, information or particulars in case such return, information or particulars relate to the director or contain any reference of any director.

 (for eg: while passing the resolution for appointment or re-appointment of the director, while obtaining their declarations as may be required and so on)

10.  Corporate Social Responsibility:

All those companies who fulfill the following criteria have to comply with the formation for the CSR committee and the policy to carry on such activities as specified under the CA 2013.

Net worth>=INR 500 Crores OR

        Turnover>= INR 1000 Crores OR
             Net Profit >=INR 5 Crores

A detailed note in this regard is available in the below link:

11.  Appointment of Secretarial auditor, Internal auditor and Cost auditor is also required, as may be applicable under the act.

12.  A broader picture on Private Limited Companies and the difference in status, between the CA 1956 and 2013 is made available here for your ready reference.

Companies Act 1956
Companies Act 2013
Sec 3(1)(iii)

A Private Company needs to have Minimum paid-up capital of Rs. 1 lakh as against Rs. 5 lakhs for Public Company.
Sec 2 (68)

The only changes are the max no of members has increased been from 50 to 200.

The concept of One Person Company has been included in the definition of a Private Limited Company.
Sec 12(1)

A Pvt. Co. can be formed by just two persons as against minimum seven persons required for incorporation of a Public Company.

Sec 3

The requirement remains the same.
Sec 58A

Deposits taken by Pvt. Co. from its members are exempt from the rigors of this section. As per the provisions of sec. 58A read with rule 2(b) of the Companies (Acceptance of Deposits) Rules, 1975 — amount received from its shareholders by a private company (provided the shareholder concerned furnishes at the time of giving the money to the company, a declaration that the amount is not being given out of funds borrowed or accepted from others) is not included in the meaning of deposit. If the depositor ceases to be a shareholder, the deposits made by him cease to qualify for exemption from the date of such cessation
Sec 73

Even as per the Companies Act 2013 the private limited companies are prohibited from acceptance of deposits from the public.

Sec 70(3)

A Pvt. Co. need not file Statement in lieu of Prospectus with ROC.
Not available
Sec 77(2 & 3)

There was no prohibition on a Pvt. Co., which is not a subsidiary of a public company, in providing financial assistance to anyone for purchasing or subscribing for its own shares or of its holding company.
Sec 67

This act removes the earlier prohibition and permits the company to provide loans to the trustees to hold the shares in their name for the benefit of the employees. However the employees can not be the trust members.

This requires a special resolution.
Sec 81

A Pvt. Co. can issue further shares in any manner; i.e. rights shares to the existing shareholders need not be offered.
Sec 62

This is applicable to a Pvt ltd co.

There is no restriction in issue of shares to the existing share holders. (ie. Earlier it was said that shares can be issued only after 2 yrs from the date of incorporation or 1 yr from the date of first allotment whichever is earlier).

The offer period to be open for not less than 15 days and not more than 30 days
The right of appeal to the Company Law Board against rejection of a transfer of shares is not available as long as the private company is only enforcing the provisions of its articles in rejecting a particular transfer. It appears from the new section 111(13) that a right of appeal will be available where the rejection is outside the provisions of the private company’s articles. The right of appeal is also available where there is transmission by court sale or sale by other public authority [s. 111(11)]
Sec 58 and 59

In case a company refuses to register the transfer of shares without sufficient cause, then an appeal can be made to the Tribunal within 30 days from the date of refusal. (pvt ltd co)

Earlier if two months had passed since the company has refused to register the transfer then the CLB candirect the company to register the transfer and then to make an appeal however the Tribunal does not give any such directions.

Procedures for obtaining certificate of commencement of business do not apply to Pvt. Co.
A Pvt. Co. can commence its business as soon as the certificate of incorporation is issued.
Sec 11

The company shall not commence any business or borrow any funds unless:

a.     A declaration has been made that the directors have subscribed to the number of shares that they had agreed to be taken by them and the paid up capital is not less than Rs. 1,00,000/- (pvt) and 5,00,000 (pub ltd. co)

b.    The company to file with the registrar a verification for its registered office.

c.     The concept of Certificate of Commencement has been removed.
Pvt. Co. is not required to hold statutory meeting or prepare any statutory report.
Exemption from AGM related requirements :

The provisions of these sections relating to general meetings, unless the provisions of any section are expressly made applicable by the company’s articles, do not apply to such a private company to the extent to which the company makes its own provisions by its articles. Relaxation in the length of Notice for calling General Meeting, contents and manner of Service of Notices, Explanatory Statements, Quorum for meeting, Chairman of meeting, Restrictions of voting rights etc. to the extent to which the company makes its own provisions by its articles..
Sec 101, 102, 103, 104, 105, 107, 109, 106, 96, 170, 43, 47

These are now applicable.
a.     21 days clear notice
b.    Explanatory statement
c.     Quorum
d.    Appointment of Chairman
e.     Proxy  - (For 50 people ?)
f.     Voting rights- if dividend has not been given to the preference share holders for more than 2 yrs then they have a right to vote at the meeting.

Passing of resolution by Postal Ballot not relevant for Pvt. Co.
Sec 2(65), 110

Ceiling on overall managerial remuneration not applicable to Pvt. Co. A private company, which is not subsidiary of a public company, may remunerate those in management, by such higher percentage of profits or in any manner as it may think fit.
Sec 2(78), Sec 197

No restriction on appointment of any firm, body corporate to office or place of profit.
The ceiling, on number of companies an auditor can audit, does not include audit of Pvt. Cos.
Sec 139, 142

Appointment of audit –
Period - 5 consecutive yrs
Reappointment – every yr
Firm being appointed – cannot be appointed for more than 2 terms of 5 consecutive yrs.
Individual being appointed – cannot be appointed for more than 1 term of 5 consecutive yrs.

Minimum Directors for Pvt. Co. is 2 (two) against 3 (three) in case of Public Co. Requirement of Independent Directors or Small Shareholders’ Directors not applicable to Pvt. Co.
Sec 2(10), 149, 151

The maximum number of Directors has been increased to 20.
A Pvt. Co. need not adopt the procedure relating to appointment, retirement, re-appointment of directors etc. applicable to a public company.
Provisions of Sec 152 (Except (6) are appliable
The provision requiring the giving of 14 days notice by new candidates seeking election as directors and deposit of certain amount (Rs. 500) are not mandatory for Pvt. Cos.
Sec 160

This is applicable to all the companies and the amount to be deposited is Rs. 1 Lac and it is subject to be refunded only when the candidate is elected.
Central Government approval for increasing number of directors beyond the permissible maximum (presently 12) not required.
No requirement of filing consent by the directors to be filed with the Registrar to act as a director.
Sec 152

Is applicable to all the companies
Central Government approval for amendment relating to appointment/reappointment of a whole-time director/ director not liable to retire by rotation.
Sec 2(94), 203

Appointment of Key Managerial personnel. Applicable to public companies, deemed public companies and such other companies.

Clarification to be provided in the rules
The disqualification u/s. 274(1) clause (g) does not include directorships of Pvt. Co..
Sec 164

Any person who is a director of the defaulting company is disqualified from being appointed as a Director.

From the wording it  appears as if it includes Directorships of Pvt Cos also
The Directorships of Pvt. Cos. not to be considered for the limit on no. of companies a person can be director.
Under Sec 165, Number of Directorships in Public Cos/ Subsidiary of Public Cos limited to ten  and twenty in Pvt. Cos

Provisions relating to formation of Audit Committee not applicable.
Sec 177

Applicable to listed company and all such other class of companies (as prescribed).
Restrictions on certain powers of Board of directors regarding selling, leasing, remitting or giving time for payments of debts, investing or borrowing moneys, or contributing to charities other than for political purpose are not applicable to Pvt. Co.
Sec 180

Applicable to all the Companies. Ordinary resolution is to be passed
Restriction on loans to directors/relatives etc. does not apply to Pvt. Co.
Sec 185

Applicable to all the companies. This section is to be read in line with the inter corporate loans sec 186
A private company which is not a subsidiary of a public company, is free from restrictions on Payment of remuneration to the directors or increase in their remuneration. The Procedures like filing Form 25C not required in case of Pvt. Co.
Sec 197, Sec 311

Is applicable even to  a private limited company which is a subsidiary of a public company

No restriction on period of appointment of managing director/manager for more than 5 years at a time.
Sec 203, 196
 Managing Director cannot by appointed for a period of more than 5 years  ata strectch

No restrictions on giving loans or guarantees to other companies or on making investment in the shares of the other companies.
Sec 2(43), 186

It is permitted Upto two layers of investment

No comments:

Post a Comment