THE DILEMMA OF EXEMPTION OF PRIVATE COMPANIES UNDER

COMPANIES ACT

Submitted By-
Ayush Gaur
SM0117012
3 Year, 5th Semester
rd

Faculty in Charge
Ms .Monmi Gohain
Assistant Professor of Law

NATIONAL LAW UNIVERSITY AND JUDICIAL ACADEMY, ASSAM

 Table of Contents

1. INTRODUCTION .............................................................................................................. 3

1.1 Overview .......................................................................................................................... 3

1.2 Literature Review: ........................................................................................................... 4

1.3 Aim: ................................................................................................................................. 4

1.4 Research Questions: ......................................................................................................... 4

1.5 Scope and Limitation: ...................................................................................................... 5

1.6 Objectives ........................................................................................................................ 5

1.7 Research Methodology: ................................................................................................... 5

2. MCA’S PROPOSED AMENDMENTS: A PARTIAL RETURN TO THE 1956

POSITION ................................................................................................................................ 6

3. ANALYSIS OF THE PROPOSED EXEMPTIONS ................................................... 10

4. CONCLUSION ............................................................................................................... 15

BIBLIOGRAPHY .................................................................................................................... 16

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 1. INTRODUCTION

1.1 Overview
On 24th June, 2014, the Ministry of Corporate Affairs issued a Draft Notification1 under Section
462 of the Companies Act, 2013, listing out 13 exemptions for private companies from
application of the Companies Act, 2013. This move comes after months of protracted debate on
the merits and demerits of applying the 2013 Act with the same rigour for all classes of
companies in India. Given the strangulating provisions of the Act as originally enacted, this is a
major relief, which has been lauded at large. One of the severest criticisms of the 2013 Act,
which overhauls the company laws of the country, is that it has homogeneous and uniform
application to all companies despite the widely differing characteristics that operate in each of
these companies. According to a critic, “one of the toughest tasks for any companies‟ legislation
is that it must be flexible and dynamic to be in a position to deal with varying types of
companies.”2 Not only does the 2013 Act fail to provide this flexibility, it also fails to grasp the
very philosophy for differential regulatory norms for public and private companies. Unlike
public companies which require greater focus on public interest, corporate governance and
investor protection, private companies are founded on fundamentally stronger relationships
between the shareholders and directors. Since they are closely held business entities that are not
permitted to issue shares to the public or accept deposits from them, stakeholders in a private
company are able to set out the terms and conditions of their relationship in its memoranda and
articles of association providing considerable flexibility. In adopting this “one-shoe-fits-all” for
all kinds of companies, the 2013 Act fails on this count. Owing to this, the exemptions proposed
by the MCA are a breath of fresh air.

In this work, the authors have attempted to analyse the proposed exemptions in light of
provisions of the 1956 and 2013 Acts, and highlight that this is a much needed relief for private
companies in India. Chapter II lists the pertinent exemptions in detail while Chapter III provides
an analysis on why the exemptions are a step in the right direction.

1
Draft Notification to be Published in the Gazette of India Extraordinary, Part II, Section 3(i), available at
http://www.mca.gov.in/Ministry/pdf/Draft_Notification_24062014_1.pdf, (Accessed on 24 October, 2019).
2
Umakanth Varottil, Proposed Relaxations to Private Companies, available at
http://indiacorplaw.blogspot.in/2019/10/proposed-relaxations-to-private.html, (Accessed on 25 October, 2019).

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1.2 Literature Review:
 Avtar Singh, Company Law, Sixth Edition, EBC Publication.
This book explains the basic concept of company like meaning of company and corporate
management and also explains the role of different authorities in the company like directors and
shareholders etc. The directors are effectively the agents of the company, appointed by the
shareholders to manage its day-to-day affairs. The basic rule is that the directors should act
together as a board but typically the board may also delegate certain powers to individual
directors or to a committee of the board. This comprehensive textbook, incorporates recent
changes as per the new Companies Act, 2013, it is a prescribed book in almost all law colleges in
India, and is equally popular among company executives

 G.K Kapoor and Sanjay Dhamija, Company Law and Practice.

This book explains the basic concept of company under Section 3 (1) (i) of the
Companies Act, 1956 defines a company as “a company formed and registered under this Act or
an existing company”. Section 2(68) of Companies Act, 2013 defines private companies”.
Within the company the directors are effectively the agents of the company, appointed by the
shareholders to manage its day-to-day affairs. The basic rule is that the directors should act
together as a board but typically the board may also delegate certain powers to individual
directors or to a committee of the board. In this book an effort has been made to present the
complicated provisions in a simple manner so that students can easily grasp them. Besides, a
number of specimen resolutions/notices have also been given.

1.3 Aim
The aim of the project is to study about the exemptions that were proposed by Ministry of
Corporate Affairs to restore the status of private companies

1.4 Research Questions:

1. What were some proposed exemptions by Ministry of Corporate Affairs?
2. Why these proposed exemptions were brought?

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1.5 Scope and Limitation:
The scope of the project is limited to study and analyzing the exemptions that were brought
under the Companies Act, 2013 by Ministry of Corporate Affairs.

1.6 Objectives
The objectives of this project are –

 To understand the exemptions proposed by Ministry of Corporate Affairs.

 To know the reason why these exemptions were brought.
 To analyze these exemptions that was proposed.

1.7 Research Methodology:

In this project, the researcher has adopted Doctrinal research. Doctrinal research is essentially a
library-based study, which means that the materials needed by a researcher may be available in
libraries, archives, and other data-bases. Mainly various types of books are used to get the
adequate data essential for this project. The researcher also used computer laboratory to get
important data related to this topic. The researcher also found several good websites which are
very useful to better understand this topic.

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 2. MCA’S PROPOSED AMENDMENTS: A PARTIAL RETURN TO THE 1956
POSITION

While there is across-the-board consensus that the Companies Act, 2013 is a better and
more vigilant legislation than the 1956 Act, an exception to this is the treatment of private
companies under both legislations. Interestingly, while the 1956 Act created specific carve outs
for private companies within the statute, the 2013 Act has taken the exactly opposite route by
making even the most stringent provisions generally applicable to all companies. Instead of
express exemptions in the Act, it has reserved the power to totally or partially exempt the
application of certain provisions for specific classes of companies by issuing notifications under
Section 462. Such notifications will then need to be laid before both houses of parliament before
they can become effective. The rationale behind this approach was that since exemptions would
be based on dynamics of business, it would better serve the interests of business if the MCA
could do it by notification, rather than through Parliamentary process. 3 An obvious loophole in
this approach is its potential to cause confusion and inconvenience. A case in point is the
application of the 2013 Act to private companies. After months of debate upon the passing of the
Act on August 29, 2013, these provisions were brought in force from April 1, 2014 and applied
to all companies at par. However, less than 3 months later, the MCA has used its power under
Section 462 to exempt private companies from 13 provisions of the 2013 Act. Most of the
proposed exemptions seek to restore the position under the 1956 Act for private companies,
underscoring the fact that not only was it unwise to apply the said provisions to private
companies, but now these companies will have to suffer months of inconvenience and
uncertainty before the exemptions are passed by the parliament and the position is clarified.

The proposed exemptions are as under:

 The provisions of Section 43 and 47 of the 2013 Act have been made wholly inapplicable
to private companies. Section 43 provides that companies limited by shares can only have
equity and preference share capital, whereas Section 47 deals with voting rights in respect of

3
See Fifty Seventh Report of the Standing Committee on Finance on the Companies Bill, 2011, (June, 2012),
Ministry of Corporate Affairs, 31, 65

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 these shares. While the 1956 Act imposed restrictions only in respect of public companies,
the 2013 Act applied these to private companies as well. The proposed exemption takes it
back to the position under the 1956 Act as private companies may now issue differential
shares with differential voting rights, which will be governed largely by their AoA.
 A partial modification has been made of Section 62(1)(a) and 62(2), by reducing the
time limit for renunciation of rights issue by existing equity shareholders. The original
section prescribes a minimum limit of 15 days and a maximum limit of 30 days. This has
been reduced to a minimum limit of 7 days and a maximum of 15 days. Under Section 81 of
the 1956 Act, private companies were altogether exempted from such a requirement.
 A partial modification of Section 62(1)(b) has been made which relates to allotment of
ESOPs. The original provision allowed such allotment only subject to a special resolution
whereas the proposed exemption allows the same subject to an ordinary resolution. Again,
under Section 81 of the 1956 Act, private companies were altogether exempted from such a
requirement.
 Application of Section 73(2) has been exempted for all private companies with 50 or less
members. Section 73(2) of the 2013 Act prohibits acceptance of deposits from the public
and mandates the repayment of any such deposits or interest due thereon within 1 year of the
commencement of the Act. The 1956 Act envisaged no such restrictions for private
companies. For this reason, the enactment of this provision drew a lot of flak from private
companies. The proposed amendment seeks to exempt this restriction for all private
companies with 50 members or less which accepts money from their members, not exceeding
25% of the aggregate of their paid-up share capital and free reserves or 100 % of the paid up
share capital, whichever is more, and which inform the details of such deposits to the ROC in
a prescribed manner.
 A partial exemption has been granted in respect of provisions relating to General
Meetings under Sections 101-107 and Section 109. These provisions shall apply to private
companies unless otherwise provided in the respective sections or the AoA of such company.
Section 101 mandates a 21 day notice for a general meeting whereas under Section 171 of the
1956 Act, a private company could decide this limit itself. Similarly, the requirement of
necessarily furnishing an explanatory statement for general meetings under Section 102
could also be done away with under Section 173 of the 1956 Act. Likewise, the need to

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 appoint proxies to vote at general meetings (S 105 of the 2013 Act) could be done away with
under Section 176 of the 1956 Act. Moreover, unlike S. 106, the 1956 Act imposed no
restriction on voting rights at general meetings.
 Total Exemption from prohibition to appoint an auditor engaged in full-time
employment of more than 20 companies under Section 141(3)(g).
 The MCA has suggested that Section 160 be made wholly inapplicable to a private
company. Section 160 relates to the right of a person other than retiring directors to stand for
directorship. Notably, the 1956 Act did not provide for a similar provision for private
companies.
 The MCA has suggested that Section 162 be made wholly inapplicable to a private
company. Section 162 prohibits the appointment of two or more persons as director by way
of a single resolution. The 1956 Act did not have a parallel provision for private companies.
 Section 180, which restricts the powers of the Board of Directors to borrow money,
invest, sell or lease undertakings, etc. without a special resolution by members, is
exempted for all private companies with 50 or less members. This proposed exemption is
only partial as it isn‟t applicable to all private companies, unlike the Section 293 of the 1956
Act, which exempted all private companies from this requirement.
 Partial Exemption of Section 185 which prohibits granting loans to directors. The
proposed amendment exempts this requirement for private companies 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 for private companies
in whose share capital no other body corporate has invested any money. Section 295 of the
1956 Act provided a total exemption in this regard to private companies.
 Total exemption of Section 188, which prohibits related party transactions. The 1956
Act provided a total exemption in this regard to private companies and allowed related party
transactions by private companies. The proposed exemption seeks to restore this position.
 Total exemption from provisions of Section 196(4) and (5). Section 196(4) mandates
Central Government approval for appointment and remuneration of a managing director,
whole-time director or manager. Section 196(5) provides that where such appointment isn‟t
approved by members in the general meeting, any action taken before this won‟t be invalid.
The proposed exemptions are in line with the 1956 Act.

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 Total exemption from provisions of Section 203(3). The section prohibits a whole-time key
managerial person from holding office in more than one company at the same time. If such
office is held, he must choose one company in which to hold the office within 6 months from
the commencement of the 2013 Act. Again, the 1956 Act had no such provision for any class
of companies. This exemption brings the position of private companies in line with that
under the 1956 Act.

Thus, it is clear that by proposing the aforementioned exemptions, a reversal to the pre-2013
status is sought. Although the same have not been finalized yet, the proposal to introduce these
exemptions itself forces one to question the wisdom of including the said provisions for private
companies under the 2013 Act.

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 3. ANALYSIS OF THE PROPOSED EXEMPTIONS

SECTIONS 43 AND 47 - KIND OF CAPITAL AND VOTING RIGHTS

This change would grant a big relief to upcoming entrepreneurs who plan to initiate a business
and investors pertaining to such companies as there would be more risk minimization by the
means of subscription to shares with differential rights as compared to that with same rights.

SECTION 62 (1) (A) & 62 (2) - FURTHER ISSUE OF SHARE CAPITAL

The permissible time frame of acceptance of an offer by the equity shareholders, made by a
notice specifying the number of shares, by way of this proposed change, has been curtailed down
which is being welcomed by the companies as the right renouncement process will become
expeditious. However, as regards the shareholders‟ perspectives, the deadline to subscribe to a
rights issue has been made stricter and hence, greater burden of adherence to the same.

SECTION 62 (1) (B) – FURTHER ISSUE OF SHARE CAPITAL

This move of partial exemption of the Government will be a speedy step especially in cases
where the shareholding is not diverse or scattered. Hence, the proposal has brought about much-
needed simplification and expected easy-execution by reduction in filing compliances.

SECTION 73 (2) – PROHIBITION ON ACCEPTANCE OF DEPOSITS FROM PUBLIC

This partial exemption granted by the proposal of July, 2014 is being seen as a boon by the
private start-ups and entrepreneurial section as the Companies Act had created a humongous
barrier to such companies by mandating compliance requirements such as issuance of circular to
members which was required to include a statement showing the credit rating, the company‟s
financial position etc.; This was a source of great inconvenience to private companies as most
private companies accumulate their capital deposits from members only, and especially so case
of closely-knit private companies. However, there are other versions of the draft, which have
been floated in the corporate world, none of which (other than the June, 2014 version) has been
acknowledged by the Ministry or put up on its website.

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It is important to note here that the jurisprudential basis of the law in question is to regulate
public deposit. However, what needs to be distinctly understood is that member deposits do not
fall within the ambit of such deposits as private companies are admittedly „private‟ concerns and
it is but natural to invest one‟s money into their own company than somewhere else. These
private firms must be given the opportunity to collect funds through repatriable modes.

(SECTION 101-107 & 109) SECTION 101 – NOTICE OF MEETING; SECTION 102- STATEMENT TO
BE ANNEXED TO NOTICE; SECTION 103- QUORUM FOR MEETING; SECTION 104 – CHAIRMAN OF

MEETING; SECTION 105 – PROXIES; SECTION 106 – RESTRICTION ON VOTING RIGHTS;

SECTION 107- VOTING BY SHOW OF HANDS; SECTION 109- DEMAND FOR POLL

This partial exemption is being viewed as a much-required welcome change as the same goes in
spirit of autonomy of the private companies to self-govern themselves and manage their internal
affairs effectively.

However, Section 108, pertaining to electronic voting which has been proposed to be retained
does not seem to be of much use as the application of the same requires a company to have more
than 1000 members, which is rare to come by.

SECTION 141 (3) (G)- ELIGIBILITY, QUALIFICATIONS, DISQUALIFICATIONS OF AUDITOR

This whole exemption is being seen as a major reason of celebration by the Chartered
Accountants, who can now be appointed as Auditors in unrestricted number of private limited
companies. However, what is pertinent to note here it that though the Legislature has intended to
keep within the ambit of this exemption only “small companies”, the law requiring fulfillment of
either of the two criteria paid up capital upto Rs 50 lacs or turnover upto Rs 2 crores, may
effectively result in companies, quite not that „small‟.

SECTION 160 – RIGHT OF PERSONS OTHER THAN RETIRING DIRECTORS TO STAND FOR

DIRECTORSHIP; SECTION 162 – APPOINTMENT OF DIRECTORS TO BE VOTED INDIVIDUALLY

The Act of 2013 had prohibited appointment of two or more Directors by means of a single
resolution, which along with the mandate of furnishing candidature of a person in the General
Meeting before appointment as a Director; caused hardships in form of enhanced compliance and

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secretarial practices. The whole exemption given out in this regard is being seen as a positive
proposal and is very much in consonance with the spirit of self-regulation of private companies.

Ironically, the Act of 2013 places more restrictions on the appointment of directors in a private
company than in a public company as under Section 152(6). Moreover, as regards retirement by
rotation, the relief proposed in terms of the requirement of pre-deposit of money is only
miniscule.

SECTION 180 – RESTRICTION ON POWERS OF BOARD

The provision is a huge relief from the numerous compliance-based restrictions imposed to the
Board of Directors with respect to matters of utmost importance, such as investing, leasing,
borrowing money etc. At the most crucial times of decision-making, waiting for the members of
vote and obtaining their consent by way of a Special Resolution seemed highly obnoxious and
counterproductive to the objective of the passing of the new Act, which is to simplify and
uncomplicated procedures.

SECTION 185 – LOANS TO DIRECTORS

The proposed draft of June had exempted the private companies, allowing them to advance loans
to directors are related parties in compliance with the conditions mentioned therein. This would
have eased the structuring of inter-corporate loans. However, the conditions were later, re-
intensified by subjecting such exemption to certain conditions. Thus, a breather was not made
available to all private companies with the intention to exclude the companies with significant
bank/public funding exposure from this dispensation.

One side of the argument, which favors such stringency of such norms flows from the
recommendations of the Irani Committee on new Company Law (2005), which recommended
that directors should be allowed remuneration or sitting fees only and in case company decides
so, loans to directors should be allowed only when company by special resolution approves such
loans.4 This argument also holds the ground when scams in the West such as Tyco are taken into

4
Irani Committee on new Company Law (2005) at para 5.1.

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consideration, where in the garb of an employment loan scheme, money was quietly thrust into
the hands of the KMP.

Meanwhile, a large section of the corporate society believes that this exemption needs to be
provided as there seems to be no logical reason as to why a private company, which is essentially
a pool of private capital, cannot act as a lender to other companies which are of interest to the
director. Moreover, it is not an uncommon occurrence for a director to be serving as a director
for a common shareholding and the idea of an entity not being able to borrow from its own
parent entity is logically flawed.

SECTION 188 – RELATED PARTY TRANSACTION.

This whole exemption is being celebrated by the private companies across the country as the
same was a source of distress and great deliberations. The restrictive provisions were
strangulating. Though this vigil mechanism was brought into effect after years of stories of
promoters undertaking malpractices by way of related party transactions, too many RPTs
warranting shareholder approval would baffle the shareholders, who would thereafter be unable
to identify the actually abusive RTPs from the genuinely required ones. For example, every
single RPT entered into by say a Tata Steel Company will need shareholder approval which
would run into hundreds of transactions every year, because the definition of related party is
wide, netting many transactions.5

Additionally, though obtaining the sanction of a general meeting, as has been mandated by may
not be a problem as generally such companies comprise of close acquaintances, a sheer
compliance burden on private companies still remains to exist.

Also, the mandate refraining the directors of a private company from participating in a board
meeting pertaining to a matter of interest is absolutely counter-intuitive as private companies do
not have any independent directors, and therefore, it the chance of a director not being interested
in a matter is rare.

5
Menaka Doshi, Related Party Transactions: Diluted & Strengthened , available at:
http://thefirm.moneycontrol.com/story_page.php?more_category=&autono=1158749 , (Accessed on 24 October,
2019).

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SECTION 196 (4); SECTION 196 (5) – APPOINTMENT OF MD, WHOLE TIME DIRECTOR OR

MANAGER

This full exemption is being welcomed by the companies as the same would reduce the cost and
time which the compliance requirements pertaining to appointment and remuneration of Key
Managerial Personnel would have eaten up.

SECTION 203 (3) – APPOINTMENT OF KEY MANAGERIAL PERSONNEL (KMP)

As per the mandate of the 2013 Act in this regard, availing the professional expertise of a key
managerial person had become a hassle. This complete exemption is being seen as a major step
towards eradication if this obstacle.

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 4. CONCLUSION

The proposed scheme aimed at bringing reforms to the present framework pertaining to private
companies though paints an optimistic picture, yet more changes are mandated as regards the
various provisions that have been analyzed as well as other aspects, which have been left
untouched by the draft notification. It must be noted that private companies have interactions
limited to a circle, which does not effect the „public at large‟ and thus, space is required to be
given to them lest they are burdened by the compliance burden being thrust upon them by the
regulatory provisions.

Grave concerns however, arise from the lack of transparency and accountability of the Ministry
of Corporate Affairs in this regard as the draft inviting comments dated June 4, 2014 though, was
put on public domain, a varied version of the same is believed to have been placed at the table of
the Parliament, which is still not available in public domain.

The fact that 99.4% of the total number of companies in India are run by individuals points
towards the fact that these provisions and the (well-deserved) exemptions not only impact a
particular category of companies, but a major part of the economy at large. Hence, serious
deliberations and application of mind is a must to arrive at a sound conclusion as regards the fate
of these companies. There still prevail several provisions lacking the basic reason behind their
applicability in context of private companies, such as prohibition on insider trading, forward
dealing and electronic voting, which raise questions as to the Legislative intent and reasonability.

Thus, though by the means of the Draft Notification which has raised aspirations in favor of
private companies, the Legislature has made feeble attempts to make half-hearted amends, a real
stride towards accomplishment of the goal to provide for an effective legal framework is yet to
made.

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BIBLIOGRAPHY
1. Fifty Seventh Report of the Standing Committee on Finance on the Companies Bill,
2011, (June, 2012), Ministry of Corporate Affairs.
2. Irani Committee on new Company Law (2005)
3. Alok Patnia, Exemptions to the Private Limited Companies as per Recent MCA
Notification,: http://taxmantra.com/exemptions-to-the-private-limited-companies-as-per-
recent-mca-notification.html/
4. K. R. Srivats, Private firms may be allowed to extend loans to directors,:
http://www.thehindubusinessline.com/economy/policy/private-firms-may-be-allowed-to-
extend-loans-to-directors/article6148463.ece
5. Umakanth Varottil, Proposed Relaxations to Private Companies, , available at
http://indiacorplaw.blogspot.in/2014/06/proposed-relaxations-to-private.html.
6. Vinod Kothari, MCA Proposes Relief to Private Companies,:
http://thefirm.moneycontrol.com/story_page.php?autono=1128301
7. Menaka Doshi, Related Party Transactions: Diluted & Strengthened, ,
:http://thefirm.moneycontrol.com/story_page.php?more_category=&autono=1158749.
8. Companies law: Private firms seek more exemptions,:
http://indianexpress.com/article/business/companies/companies-law-private-firms-seek-
more-exemptions/
9. Notification for Exemption of Private Companies from Certain Provisions of the
Companies Act, http://archanabala.com/2014/06/25/notification-for-exemption-of-
private-companies-from-certain-provisions-of-the-companies-act/
10. Goda Anirudh Raghavan & Vartika Jain, Game of Loans: Section 185 of the Companies
11. Act, 2013,: http://barandbench.com/content/212/game-loans-section-185-companies-act-
2013
12. Don't apply related-party norms to private firms: Satwinder Singh,: http://www.business-
standard.com/article/economy-policy/don-t-apply-related-party-norms-to-private-firms-
satwinder-singh-114091400692_1.html
13. Draft Notification to be Published in the Gazette of India Extraordinary, Part II, Section
3(i), http://www.mca.gov.in/Ministry/pdf/Draft_Notification_24062014_1.pdf

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