Main change in the definition of a private company is in the increase in the limit of the number of members from 50 to 200 . Secondly, the definition does not state that a company inviting or accepting deposits from persons other than its members, directors or their relatives cannot be a private company. (section 2(68) of the 2013 Act).
Certain requirements which were till now applicable to public companies or subsidiaries of public companies have now been also extended to private companies . Some such requirements include the following:
• Section 90 of the 1956 Act, which was a saving section for private companies, has not been incorporated in the 2013 Act, thus making the provisions relating to the various kind of share capital and voting rights applicable to private companies: Setting up of a Company (share capital and debentures)
• Provisions for the appointment of managerial personnel, in section 196 of the 2013 Act, are also applicable to private companies.
the following requirements are now applicable to private companies:
– The re-appointment of a managerial person cannot be made earlier than one year before the expiry of the term. However, the term for which the managerial personnel can be appointed is five years
– The eligibility criteria for the age limit has been set between 21 to 70 years. An individual above the age of 70 years can also be appointed as the key managerial personnel by passing a special resolution.
– In addition, private companies have the option to adopt principle of proportional representation for appointment of directors (section 163 of the 2013 Act).
• The 2013 Act restricts certain powers of the board of private companies, which can be exercised only with the company’s consent by a special resolution. Some powers thus restricted are as follows :
– To sell, lease or otherwise dispose of the whole or substantially the whole of the company’s undertaking
– To borrow money in excess of the aggregate of its paid-up share capital and free reserves
• The requirements relating to corporate social responsibilities are also applicable to private companies since the criteria is based on specified levels of the net worth, turnover and net profit. However, it is of relevance to note, that while private companies are not required to appoint independent directors as per section 149 of the 2013 Act, the section on CSR, requires companies within the specified thresholds to constitute a corporate social responsibility committee consisting of three or more directors, out of which
at least one director must be an independent director. This requirement appears to be contradictory to the extent that the section applies to private companies: Corporate Social Responsibilities
• Private companies would now be required to comply with the requirements for inter-corporate loans as well as investments, which were hitherto not applicable: Directors (Meetings of the Board and its Powers – Loans and investments by a company)
• The provisions relating to the appointment of the managing director, whole-time director or manager are also applicable to private companies. Directors (Appointment and remuneration of managerial personnel – Introduction)
• For certain other compliance requirements: Directors (General – Additional compliance requirements for private companies).
Further issues
Section 62 dealing with further issues of shares is the new avatar of Section 81 of the previous Companies Act. Section 62 is protector of rights of existing shareholders in that it offers the right of pre-emption or the anti dilution right to investors in a company. The earlier Act exempted private companies from the provisions of this section and rightly so. There is no such exemption under the Companies Act.
Rights Issue
As under the previous Companies Act, existing shareholders have the right to be offered first any subscription to additional capital in the Company. However, under the previous Companies Act, the shares had to offered to existing shareholders only after the initial capitalisation phase had ended, which the law placed at 2 years from the date of incorporation or the first issue of shares. This helped companies to capitalise and infuse funds without the dagger of compliance hanging on their heads. Now, even a private company shall from first day of incorporation offer its shares to all exisitng shareholders before issuing shares to any person. In most cases, the promoters incorporate a company with the minimum paid up capital needed under law i.e. INR 1 lakh and thereafter infuse funds over a period of time.
Unless the articles of the company otherwise provide, in the case, where existing shareholders do not accept the offer or renounce, the directors should dispose of such shares in a manner “non dis-advantageous” to the shareholders and the company. It is very difficult to construe what not disadvantageous means.
Issue of shares and Debentures rules and ESOPs:-
In addition to the special resolution, the Companies (Share Capital and Debenture) Rules, 2014 require certain other requirements as well of an unlisted company including inter alia the following:
a) Restriction on quantum of sweat equity shares to be issued at 15% of existing paid up share capital or value of INR 5 crore whichever is higher, with a total cap of 25% of paid up share capital at all times,
b) Lock-in of 3 years on the sweat equity issued,
c) Valuation of intellectual property to be made by a registered valuer, and
d) Treatment of sweat equity as part of compensation package of the concerned employee.
Preferential issue :-Certain compliances is required for such preferential issues:
a) A special resolution needs to be passed,
b) Requisite disclosures in the explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 of the Act inter alia with respect to the following:
- object of the issue,
- price band,
- basis of price and report of registered valuer,
- intention of promoters/ KMP to subscribe to the offer,
- change in control purusant to the preferential allotment,
- details of allotment in the previous year.
Private Placement :-
Private placement has been defined to mean any offer of securities or invitation to subscribe to securities to a select group of persons by a company through issue of private placement offer letter.
Typically, the provisions of private placement was necessary to allow listed companies or public companies to obtain additional capital without having to go to the public under a further public offer or a rights issue as the case may be.
Any placement by a private company would by definition need to be a private placement without the law imposing such additional restrictions on private companies.
In order to qualify as a private placement under the new Companies Act, companies need to ensure that :
- Offer of securities or invitation to subscribe to securities cannot be made to persons (excluding QIBs and employees subscribing to shares under an ESOP scheme) exceeding 50 or such higher number as may be prescribed in a financial year.
- Offer or invitation shall be made to not more than 200 persons in aggregate in a financial year.
Invite the public to subscribe to any securities of the Company. The articles of association will contain restrictions in this behalf. The issues that arise from application of this section to private companies can be seen in the following:
i. Any offer or invitation not in compliance with this section shall be deemed to be a public issue;
ii. Monies cannot be collected in cash and can only be collected through normal banking channels;
- Allotment of securities shall be within 60 days from the date of receipt of application monies, otherwise application monies shall be refunded within 15 days from the expiry of 60 days;
- Monies received under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than for adjustment against issue of shares or repayment on non-allotment of securities.
Non Compliance's Penalties :-
The real menace is Section 42 (10) which prescribes penalty for non-compliance whereby the company, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or INR 2 crores, whichever is higher and the company shall refund all monies to subscribers within 30 days of imposition of penalties.
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