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October 16, 2017 Registrationwala

New Exemptions Granted to Private Limited Companies

Private Limited Company

New Exemptions Granted to Private Limited Companies

Companies Act 2013 which replaced the earlier Companies Act 1956 levied certain Restrictions on the Private Limited Company. Due to which the owners of private limited company raised concerns. Keeping in mind the interest of the private limited company an exemption list provided to the private limited company was released on 5th June 2015. Following exemptions were granted to the private limited company through the notification of 5th June 2015-

  1. Related Party Transactions- With the implementation of companies Act 2013 undertaking the related party transactions required the board approval and in some case, the approval of shareholders is required.

The amendment introduced modified the definition of a 'related party' for private limited companies. Due to which the following were excluded from the definition of related party-

 (a) Holding companies

 (b) Subsidiary companies

 (c) Associate companies

 (d) Subsidiaries of holding companies of the private limited company.

 Thus, transactions of a private company with Exempted Entities will not be considered to be a "related party transaction" and will not require compliance with the provisions of Section 188 of the 2013 Act. Further, the related parties were not permitted to vote at a general meeting of shareholders for a resolution to approve any contract or arrangement between the company and a related party. Through the Exemption Notification, this restriction will also be removed from the private limited company.

  1. Kinds of Share Capital- Companies Act 2013 put forward the restriction on the private limited company that it can issue only two kinds shares i.e equity shares and preference shares. This restriction was removed through the exemption list issued. Thus now private limited companies are free to issue any type of share they desire without any restriction but subject to their charter. This helped the private limited companies to issue any class of shares.
  2. Accepting deposits from members- The companies Act 2013 permits all kinds of companies to accept deposits from their members subject to the fulfillment of certain conditions. After the exemption list was released these restrictions do not apply to the private limited companies accepting deposits from members which are less than 100% of its paid- up share capital and free reserves. However, the private companies are required to file the details of such deposits received from the members with the registrar of companies in the prescribed manner.
  3. Power to purchase own shares- Earlier no private limited company and the public limited company was empowered to purchase its own shares. However now the private limited companies who satisfies the following conditions are empowered to purchase its own shares-
  • No other body corporate has invested any money in share capital of the Company
  • Borrowing from banks, Financial Institutions or Body corporate is less than twice of its paid up capital or ? 50 crore, whichever is lower
  • Such a private company should not have defaulted in repayment of borrowings as may be existing on the date of the transaction under the section.
  1. Loan to directors- As per the provision of section 185 of the companies act 2013 no company can advance loan to its directors or any person in which director is interested. Further, it prohibits giving any kind of guarantee or providing any security in connection with any loan that the directors avail in their personal capacity. Now an exemption is being granted to the private limited companies for granting loans if they satisfy the following conditions-
  • There shall be no other body corporate shareholder in the lending company
  • If the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower
  • Such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this Section.
  1. Resolutions and agreements- As per the Companies Act 2013 the private limited companies were required to file the all kinds of resolutions passed and the agreements made with the registrar of companies. However, after the exemption list was released they are no more required to submit the resolution and agreements with the ROC.
  2. Auditors’ Eligibility- The restriction was imposed by section 141 of companies Act 2013 to the auditing firms, partner or the partnership firms. The auditor who is in full time employment elsewhere or in the capacity as auditor of more than 20 companies at the date of appointment or reappointment shall not eligible to be appointed as auditor of the company.

The exemption notification has modified this restriction. Now the appointment of a person as an auditor of one person companies, dormant companies, small companies; and private limited companies having a paid up share capital of less than Rs. 100 Crore may appoint its Auditor irrespective of the limit of 20 audits provided earlier.

  1. Participation of interested directors- Under the Companies Act 2013 the director is required to disclose his interest in the company with whom a contract and arrangement is entered if he is directly or indirectly is in association with that company. Further, he was not allowed to participate in a meeting of the board where discussion of this contract or arrangement is held. This restriction made it difficult to many private companies to comply with companies act provision, particularly in companies having two directors and either one or both of them are interested. Thus through the exemption list, the interested directors were allowed to participate in the meeting where such contracts or agreements are discussed.
  2. Appointment of senior personnel- As per the sections of companies Act any appointment of the Senior Management by the board of directors shall be subject to the approval of shareholders at a general meeting. The companies appointing Senior Management are also required to comply with the prescribed terms and conditions. In case of failure to comply with the terms and conditions specified in Schedule V, the approval of the central government is required to be obtained by the relevant company.

Further, if the shareholders at a general meeting do not approve the appointment of the Senior Management by the board of directors, such disapproval shall not result in the actions of the Senior Management prior to the general meeting becoming invalid.

Through the exemption list, this restriction is not applicable to the private limited companies.

  1. Minimum Capital Requirement- Earlier in order to incorporate the private limited company, it was mandatory for every private limited company to have a minimum paid-up share capital of rupees 1 Lakhs. Through the exemption list, the requirement of minimum share capital has been removed.

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