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SUMMARY ANALYSIS OF EXEMPTIONS GRANTED TO PRIVATE COMPANIES

FROM THE PROVISIONS OF COMPANIES ACT, 2013
The Ministry of Corporate Affairs has vide Notification dated June 5, 2015 exempted private
companies from certain provisions of the Companies Act, 2013 (Act) subject to such exceptions,
conditions etc. as specified in this notification.
A brief note on exemptions granted to private companies is detailed herein below:
Details of section /
provision
Related Party Definition
[Section 2(76)(viii)]

Summary of extant provisions

Per Clause (viii) of Section 2(76), the term
related party with reference to any
company, includes:
(a) A holding, subsidiary or an associate
company of such company; or
(b) A subsidiary of a holding company
to which it is also a subsidiary.

Kinds of Share Capital

The share capital of a company limited by

shares can only be of two kinds namely:

[Section 43]
(a) Equity share capital with voting
rights, or differential rights as to
dividend, voting etc.; or
(b) Preference share capital

Voting rights [Section 47]

Subject to certain exceptions:

(a) The voting rights of an equity
shareholder on poll shall be in
proportion to his share in the paid up
equity share capital in the company;
(b) A preference shareholder shall have
a right to vote only on resolutions
which directly affect the rights
attached to his preference shares and
other specified circumstances.

Rights Issue

A company may make an offer of shares

Details of exemptions / relaxations granted

to private companies
Clause (viii) of Section 2(76) has been made
inapplicable to private companies for the
purposes of Section 188 (Related Party
Transactions) of the Act.
In other words, the provisions of Section 188
shall not apply to any transaction between a
private company and the categories of persons
specified u/s 2(76)(viii) of the Act.
The said provisions shall not apply to private
companies if the memorandum and articles of
association of the private company so
provides.
Accordingly, private companies shall be free
to have any kind of share capital, without
being restricted by the provisions of Section
43.
The said provision shall not apply to private
companies, if the memorandum and articles of
association of the private company so
provides.
Accordingly, subject to requisite powers in
their memorandum and articles, private
companies are free to issue equity shares and
preference shares with such voting rights as
they deem fit, without being restricted by the
provisions of Section 47 of the Act.

A new proviso has been inserted after existing

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Details of section /
provision
[Section 62(1)(a)(i) and
Section 62(2)]

Employees Stock Option

[Section 62(1)(b)]

Restrictions on purchase
by a company [Section
67]

Summary of extant provisions

on rights basis by notice specifying the
number of shares offered, and limiting a
time not being less than 15 days and not
exceeding 30 days from the date of offer,
within which the offer, if not accepted,
shall be deemed to have been declined.
[Sec 62(1)(a)(i)]
Notice to be despatched by registered post,
speed post or electronic mode three days
before opening of issue. [Sec 62(2)]
A company is required to pass a special
resolution for offer of shares to employees
under a scheme of employees stock
option.

A company limited by shares or by

guarantee and having share capital is
prohibited from buying its own shares
unless consequent reduction of share
capital is effected under other applicable
provisions of the Act.

Deposits from members

[Section 73(2)(a) to (e)]

Clauses (a) to (e) of Section 73(2)

prescribe the conditions subject to which a
company may accept deposits from its
members.

Notice of general meeting

(Sec. 101),

A company is required to give notice of

not less than 21 days for every general
meeting.

Explanatory
(Sec. 102),

Details of exemptions / relaxations granted

to private companies
Section 62(1)(a)(i), with respect to private
companies.
As per the proviso, a private company may
specify lesser periods than those prescribed
under Section 62(1)(a)(i) and 62(2) with
respect to rights issues, if consent is obtained
in writing or in electronic mode from ninety
percent (or more) of the members of the
company for the same.
The words special resolution are to be
substituted with the words ordinary
resolution, for the purposes of applying the
provisions of Section 62(1)(b) to private
companies. In other words, private company
would only have to pass an ordinary
resolution for approving an offer of shares
under employees stock option scheme.
The provisions of Section 67 have been made
inapplicable to private companies:
(a) In whose share capital no other body
corporate has invested any money;
(b) If the borrowings of such a company
from banks or financial institutions or
any body corporate is less than twice its
paid up share capital or fifty crore
rupees, whichever is lower; and
(c) Such a company is not in default in
repayment
of
such
borrowings
subsisting at the time of making
transactions under the said Section.
The provisions of clauses (a) to (e) have been
made in applicable to a private company
which accepts from its members monies not
exceeding one hundred per cent of aggregate
of the paid share capital and free reserves, and
such company is required to file details of
monies so accepted to the Registrar in
prescribed manner.
The aforesaid sections have been made
subject to the articles of association of a
private company.

Statement

Quorum (Sec. 103),

Notice of general meeting is required to be

annexed with explanatory statement in
respect of each item of special business.

Chairman (Sec. 104),

Every general meeting is required to have

Accordingly, a private company may choose

to have provisions which are different from
Sections 101 to 107 and Section 109 of the
Act in its articles.

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Details of section /
provision

Summary of extant provisions

Proxies (Sec. 105),

Restriction on
rights (Sec. 106),

voting

Voting by show of hands

(Sec. 107) and by poll
(Sec. 109)

Filing
of
Board
Resolutions in Form
MGT-14
with
RoC
[Section 117(3)(g)]

Disqualifications
auditor

minimum quorum of members as

prescribed. The Act further provides for
detailed provisions relating to appointment
of Chairman, nomination of proxies by
members, voting by show of hands and
procedure for voting by poll in general
meeting.
Further, a company is restricted from
prohibiting any member from exercising
its voting rights on grounds other than as
specified under Section 106 of the Act.
Per Section 117(3)(g), any board
resolution passed by a company under
Section 179(3) of the Act has to be filed
with the Registrar in Form MGT-14.

of

Any person holding appointment as an

auditor of more than twenty companies is
not eligible to become an auditor of a
company.

Right of persons other

than retiring director to
stand for directorship

A person who is not a retiring director in

terms of Section 152 is specified to be
eligible for appointment as a director only
if the said person or some other member
has left notice in writing signifying his
candidature as director together with
deposit of one lakh rupees at the registered
office of the company.
The Act prohibits a motion for
appointment of two or more persons as
director of the company in a general
meeting by a single resolution, unless a
proposal to move such a motion has first
been agreed to at the meeting without any
vote being cast against it.
Section 180 of the Act enumerates specific
powers which can be exercised by the
Board of Directors only with the consent
of the company by a special resolution.
Every director who is in any way directly
or indirectly concerned or interested in a
contract or arrangement with specified
categories of persons is required to
disclose the nature of his concern of
interest at a meeting of the Board in which
the contract or arrangement is discussed,
and prohibited from participating at the

[Section 141(3)(g)]

[Section 160]

Appointment of directors
to
be
voted
on
individually
[Section 162]

Restrictions on powers of
the Board
[Section 180]
Disclosure of interests in
certain
contracts
or
arrangements
by
directors
[Section 184(2)]

Details of exemptions / relaxations granted

to private companies

Private companies have been exempted from

said provision.
Accordingly, private
companies no longer have to file board
resolutions passed under Section 179(3) of the
Act in Form MGT-14 with the Registrar of
Companies.
Appointments as auditor in one person
companies, dormant companies, small
companies and private companies having paid
up share capital less than hundred crore rupees
have been excluded for the purpose of
computing said limit of twenty companies.
Private companies have been exempted from
said section.

Private companies have been exempted from

said section.

Private companies have been exempted from

said section.

The duty to disclose interest or concern

continues to apply to directors of private
companies.
Such directors have however been permitted
to participate in such meeting after disclosure
of interest.

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Details of section /
provision
Loans to directors etc.
[Section 185]

Related
Transactions

Party

[Second proviso to subsection (1) of Section

188]

Appointment of whole
time
and
managing
directors etc.
[Sub-sections (4) and (5)
of Section 196]

Summary of extant provisions

meeting.
This Sections prohibits a company from
granting a loan to any of its directors or to
any person in whom the director is
interested or giving any guarantee or
providing any security in connection with
any loan taken by such persons.

Section 188 requires a company to take

approval of its shareholders by way of an
ordinary resolution for entering into any
related party transactions which is in
excess of specified limits.
Second proviso to Section 188(1) prohibits
a member from voting on any such special
resolution, if such member is a related
party.
A managing director (MD), whole time
director (WTD) or manager is required
to be appointed subject to the provisions of
Schedule V.
The appointment and
remuneration of said officers is required to
be approved by the Board of Directors,
subject to approval at the next general
meeting of the company.

Details of exemptions / relaxations granted

to private companies
The provisions of Section 185 have been
made inapplicable to private companies:
(a) In whose share capital no other body
corporate has invested any money;
(b) 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; and
(c) Such a company has no default in
repayment
of
such
borrowings
subsisting at the time of making
transactions under this section.
The provisions of second proviso to Section
188(1) have been made inapplicable to private
companies.
In other words, a member of a private
company can vote on a special resolution for
approval of a related party transaction, even if
such member is a related party.

The provisions of sub-sections (4) and (5) of

Section 196 have been made inapplicable to
private companies.
One important implication of this exemption
is that Part I of Schedule V of the Act, which
inter alia requires that a MD, WTD or
manager should be a person resident in India,
will no longer apply to private companies.
Further, private companies would no longer
be required to seek approval of their members
for the appointment of MD, WTD or manager.

Interestingly, the Notification goes on to state that, private companies, while availing such
exemptions, should ensure that the interests of the shareholders are protected. To this extent, the
Notification seems to place paramount importance on protection of interests of shareholders. The
notification does not state what consequences would follow if shareholders of a private company object
to actions taken by the private company pursuant to the exemptions granted under this notification, on
grounds that actions of the company were prejudicial to the interests of shareholders. As of now, this
question is only hypothetical, and it would be interesting to see how the courts / tribunals would rule if
this particular aspect is contested in any case.

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All in all, the notification reduces the rigours of compliance with the provisions of the Act for
private companies to some extent. The exemptions granted to private companies would be widely
appreciated, as this now brings the Act more in line with the provisions of Companies Act, 1956, in its
application to private companies.

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