Relaxation to Private Limited Companies

  • July 06, 2022
  • Dushyant Sharma
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Private limited companies are always considered to be the best vehicle to start a business because of its unbeatable advantages. Private limited companies are always suitable for every type of businessman regardless of their size of operations. Some of the biggest private limited companies are incorporated as private limited companies such as flip kart, Paytm brand etc they all are private limited company registration.

Since most of the private limited companies are owned by family members or their relatives, so there is lesser public intervention. There is hardly any chance when any outsider invests in the companies. Outsider funds in terms of private equity are only required when company need a huge amount of funds otherwise members manage the fund's requirement on their own.

When companies act, 2013 was enacted and came into effect then at that time it was considered as the draconian law which contained very harsh provisions, moreover, those were applicable on every type of companies. After the few months of passing of the new act, there started hue and cry among the investors and companies because of so much restriction to carry on business. There were introduced so much procedures and procedure because of that running of the company seemed to be difficult and the company was crawling.

After few times Government started to realise that in this way it could be very difficult to manage the corporate sector and desired results could not be attained. Therefore, on 5th June 2015 Ministry of Corporate Affairs (MCA) had issued a notification which exempted the private limited companies from following so many harsh and procedural aspects. That was really a sigh of relief for the private limited companies. Let's go through some of the major exemptions step by step:

  1. Earlier holding and subsidiary companies were considered to be related party but after exemption, these two entities are not considered as a related party. Benefits of this exemption are that private limited companies are not required to follow the harsh provisions while dealings with its subsidiary or holdings companies.
  2. Private limited companies other than the section 8 companies which have paid up share capital of Rs. 50 Lakh or less or average turnover is 2 crore or less may convert itself into one Person Company just by passing a special resolution in the general meeting.
  3. Earlier related parties are not allowed to vote in the general meeting but after came into exemptions, even related party can also vote on such matter or you can say resolution
  1. Now if private limited companies want to issue shares to its employees under ESOPs (Employees stock option scheme) only ordinary resolution are required to file. Earlier it was mandatory to pass a special resolution. The difference between ordinary and special resolution is that in case of ordinary resolution to be passed only votes in favour of a matter must be more than votes cast against it while in case of special resolution votes cast in favour of the decision is at least three times more than the votes cast against them.
  1. Earlier there were restrictions that company can not purchase its own shares but after issuing the notification private limited companies can buy its own shares.
  1. The major relief which was offered to the private limited companies is that of exemptions from the deposit provisions. Earlier, there were compliances which were required to be done before accepting any deposit from the members. But now private companies are required to follow those stringent provisions if private limited companies accept deposit up to 100% of the aggregate of paid-up share capital and free reserve. Only details of deposit are required to be reported to the ROC.

Also Read: What is the Applicability of the internal audit procedure?

  1. To conduct the General meeting, there are certain compliances such as notice of a general meeting, quorum, chairman of the meeting, proxies, restrictions on voting rights, voting by show of hands which are prescribed under the companies act. Now, private limited companies can have their own regulations with respect to the above-mentioned items.
  1. There were certain requirements under the act to report the matter to ROC such as the issue of shares, borrow money, invest funds of the company, approve financial statements, approve merger and amalgamation, but all these matters are not required to report to the ROC in form MGT-14. It further reduces compliance requirement of the private limited companies.
  1. If private limited companies having paid up share capital of less than Rs. 100 crore then they may appoint its auditor irrespective of the limit of 20 audits as prescribed under the act. This will provide the flexibility to the companies in the appointment of their auditors. This provision is also beneficial for the auditor because there is a bar on the number of audits which can be done by the auditors.
  1. There were certain procedures if you want to appoint a person as a director of the company which state 14 days notice before the meeting where his appointment shall be considered along with deposit of Rs. 1 lakh. So, this is not applicable to the private limited companies.
  1. There are certain matters which the board of directors can not approve without taking approval from the shareholders such as selling of any business, to borrow money beyond certain limits, etc. Now, directors of the private limited companies can take a decision regarding these matters without obtaining any prior approval from the shareholders.
  1. It is prescribed that if the director is interested in a particular matter then he can not participate in that matter, but now there is relaxation in this regard. The director can take part in the matter in which he is interested after disclosing his interest but he shall not be counted as a quorum.
  1. Section 185 is one of the controversial provisions of the companies act, 2013 which prohibits loan to directors. But, now this provision is relaxed for the private limited companies if certain conditions are fulfilled which are as follows:
  1. No other body corporate has invested in the share capital of the company
  2. If borrowing of such companies is less than twice of the amount of share capital or Rs. 50 crore, whichever is less.
  • Such company is not a defaulting company in the payment of the loan which exists at the time of making such transaction.

Even now a company can give a guarantee in connection with any loan taken by its director.

  1. Now, an appointment of managing director (MD) or Whole-time director(WTD) or manager in the private limited companies and terms and conditions of such appointment need not be approved by the board of directors at its meeting and also shall not require shareholder approval. Consequently, approval of Central Government is also not required.

All these exemptions are allowed by keeping in mind the ease of doing business in India and allow the private companies to manage their affairs in their own way

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Dushyant Sharma
Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.

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