Companies (Amendment) Act, 2015 Exemptions to Private Companies
Contents 1. Key Words 2. Introduction 3. Key Amendments
4. Exemptions
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Minimum paid up share capital Commencement of business Related Party Transactions Exemptions from ambit of Section 185 – Loans to directors Disclosure of details related to frauds in Board’s report Auditor to report of fraud committed by the Company Non- availability of certain resolution filed for inspection Punishment for contravention with provisions of deposits Declaration of dividend Common Seal
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Capital Instruments and Voting Rights Rights issue Matters relating to General Meetings Restrictions on power of the Board Loan to Directors Related Party Transactions Appointment and remuneration of MD, WTD and Manager Issue of ESOP Restriction on giving loan by company for purchase of its shares Acceptance of deposits from members Filing of resolutions Auditors’ Eligibility Candidature of non-retiring director for directorship Interested director participation in Board Meeting Appointment of more than one director in a single resolution
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Key Words Act
Companies Act, 2013
Amendment Act
Companies (Amendment) Act, 2015
AOA
Articles of Association
Auditor
Statutory Auditor
Board
Board of Directors
ESOP
Employees’ Stock Option Plan
FDI
Foreign Direct Investment
MCA
Ministry of Corporate Affairs
MOA
Memorandum of Association
MD
Managing Director
ROC
Registrar of Companies
RPT
Related Party Transactions
RD
Regional Director
WTD
Whole-time Director
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Introduction ►
Companies Act, 2013 and the rules notified thereunder, intended to revamp the corporate law regulations from the Companies, 1956, had blurred the distinction between private companies (not being subsidiary of public company) and public companies making them almost at par with in several respects.
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Under the Companies Act, 1956 private companies (not being subsidiary of public company) which were enjoying several privileges and concessions as compared to public companies, were subject to onerous provisions creating interpretational and implementing issues, resulting in hassles for smoother business administration
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Pursuant to various representations by the stakeholders and with a focus to ease the restrictions and promote business, the Central Government (Ministry of Corporate Affairs) has suitably amended certain provisions of the Act vide the Companies (Amendment) Act, 2015 effective from 29 May 2015 and thereafter notified exemptions to the private sector entities effective from 5 June 2015
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The slide deck summarizes the overview of the key amendments introduced and provided for the private limited companies
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exemptions
Key Amendments
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Key amendments Minimum paid up share capital
► Every private and public company was required to have a minimum paid up share capital of INR 100,000 and INR 500,000 respectively
Existing Provision
► The above mentioned share capital was required to be brought in at the time of incorporation and the company was required to maintain the same throughout the lifetime of the company
► The provision for a minimum paid up capital has been done away by amending the definitions of private and public company in the Act
Amendment
Impact
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► Any company may now incorporated with each subscriber subscribing to one share of the company
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Key amendments Commencement of business ► A newly incorporated company was required to furnish the following forms/declaration/documents before commencing business activities post incorporation
Existing Provision
§ Declaration confirming receipt of funds towards capital § Confirmation on the place of the Registered Office within 180 days from the date of incorporation
► The above mentioned provision has been omitted for the purpose of commencement of business
Amendment ► A company can now commence business immediately post incorporation
Impact
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Key amendments Related Party Transactions ► The Act specifies that certain transactions with related parties are treated as RPTs, such as sale / purchase of goods & materials, leasing of property, rendering of services, etc
Existing Provision
► For a RPT, the Board would require to pass resolution and thereafter also obtain shareholders’ approval by way of special resolution for entering into related party transactions if it is above the prescribed threshold limit ► Also, the definition of Related Party Transaction was wide enough to even cover transaction between holding company and its wholly owned subsidiary ► Now post the Board resolution, shareholders’ approval is required by way of ordinary resolution
Amendment
► Transactions between Holding company and its wholly owned subsidiary will not be considered as RPT where the wholly owned subsidiary’s accounts are consolidated with its holding company and approved at the general meeting ► Special resolution, being the requirement for a minimum of 75 percent affirmative votes in favour, was stringent when compared to ordinary resolution which requires a majority of 50 percent affirmative votes, thereby making it easier now to obtain shareholders’ approval for RPT’s
Impact
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► The transactions between holding company and wholly owned subsidiary will not be considered as RPT subject to condition
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Key amendments Exemptions from ambit of section 185 – Loans to directors ► Giving of loan to directors or any other person in whom the director is interested was prohibited
Existing Provision
► A person in whom the director is interested would include private company where the person is a director or member and other body corporates where any director individually or together with other directors has 25% of the total voting power Following exemptions have been provided in the Act ► Any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company
Amendment
► Any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company The above loans are utilised by subsidiary for its principal business activities ► Even if there are common directorships and / or persons in whom the director is interested, the holding company can give loan/guarantee/provide security to its wholly owned subsidiaries subject to conditions
Impact
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► Holding company can also give guarantee towards any loan taken by the subsidiary company subject to conditions ► Once the amendment to empower Audit Committee of a Board (under Section 177 of the Act) is notified, there can be omnibus approval for the related party transactions with such conditions as may be prescribed by the committee
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Key amendments Disclosure of details related to frauds in Board’s report
Existing Provision
► There was no provision which mandated the disclosure of frauds reported by the auditor, in the Board's report
► Frauds reported by auditor to the Board or to the audit committee, other than those reportable directly to the Central Government, to be disclosed in the Board’s report
Amendment ► Now frauds reported by auditor will have to be disclosed in the Board’s report by virtue of this new provision
Impact
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Key amendments Auditor to report of fraud committed by the Company
Existing Provision
► Statutory auditor of the company was responsible to report frauds identified during his audit, to the Central Government
► Provision amended to empower MCA to create limits for reporting of frauds either to the Central Government or to the Board of Directors depending on the threshold of amounts involved in such frauds
Amendment ► Once this provision is notified, auditors will have the onus to report frauds either to the Central Government or to the Board of Directors depending on the quantum of fraud
Impact
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► The Board will have to lay down comments in the Board’s report on the frauds reported by the auditor
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Key amendments Non- availability of certain resolution filed for inspection ► Resolutions passed by the Board in respect of certain matters such as borrowing monies, buy-back, investing funds, approving amalgamation, etc was required to be filed in Form MGT 14
Existing Provision
Amendment
► The filed Forms, of both private and public companies, were made available for public inspection
► The amendment is easing the requirement for filing MGT 14 for the matters as mentioned above. Further, the filed forms will be restricted from public viewing on MCA website
► Stakeholders and general public will no longer be able to check the filed MGT 14 for the above mentioned matters on the MCA website
Impact
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Key amendments Punishment for contravention with provisions of deposits ► The Act did not provide for a penalty for contravention of provisions on acceptance of deposits from public
Existing Provision
► The same was provided for in the rules made in this regard, as a residuary penalty provision New section added in the Act for imposing penalty on contravention of provisions on deposits under Section 73 & 76 of the Act, as given below – ► The company shall be fined which shall not be less than INR 1 crore subject to maximum of INR 10 crore, along with payment of amount of deposit and interest, and
Amendment
► Every officer of company in default is punishable up to seven years of imprisonment and / or with fine not less than INR 25 lakhs, subject to maximum of INR 2 crores
► Companies to revisit their existing transactions to examine the possibility of having accepted deposits or any amounts becoming deemed deposits, which now attracts hefty penalties
Impact
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Key amendments Declaration of dividend ► The Act does not provide restrictions on declaration of dividend
Existing Provision
► However, the rules in this regard required that carried over losses and depreciation not provided in previous year(s) were to be set off against current year’s profit prior to declaration of dividend
► The provision given in rules is now included in the Act
Amendment ► Previously when the restrictions / conditions to declare dividend were prescribed in the rules, rather than the Act, one could possibly argue that the rules cannot override the provisions of the Act and hence the restrictions imposed by the rules may not apply
Impact
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► Companies would now be mandated to offset the previous years’ accrued losses against current year’s profits before declaring any dividends
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Key amendments Common Seal
Existing Provision
► Every Company was required to have a common seal
► Common seal is made optional
Amendment ► Maintaining of Common Seal is now not mandatory for the Companies which are proposed to be incorporated
Impact
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► Existing companies having a Common Seal shall continue to use the same and can do away with the requirement by amending their articles of association suitably in this regard
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Exemptions
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Exemptions Capital Instruments and voting rights ►The Act restricted the types of capital instruments to only equity and preference for both private and public companies
Existing Provision
►Equity shares carried right to vote, in proportion to the paid up share capital held, on every matter placed in a general meeting ►Preference shares carried voting rights only in respect of matters affecting their rights and in cases where dividend is not received
►The mentioned provisions are no longer applicable to private companies unless their MOA or AOA state otherwise
Exemption Private companies can now ►Explore alternate types of instruments with or without the need to comply with rules applicable to differential equity shares
Impact
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However, entities covered in the ambit of FDI, will still be bound by the FDI policy with respect to the instruments that can be issued
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Exemptions Rights Issue
Existing Provision
►Rights Issue offer letter to be issued to the shareholders at least 3 days prior to offer opening date and the offer was required to be open for a minimum period of 15 days
►A new proviso added to provide that in case ninety percent of the members of a private company give consent in writing or in electronic mode, the rights issue offer periods can be lesser than those specified above
Exemption Private companies can now ►Dispatch / deliver rights issue offer letter less than 3 days prior to offer opening date and Rights offer window period can be less than 15 days
Impact
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►Have shorter offer periods for completing rights issue post getting consent from their members
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Exemptions Matters relating to General Meetings
Existing Provision
►The Act governed the provisions relating to a general meeting, such as period of 21 clear days for issuing notice, quorum for such meetings, voting rights at meetings, proxies attending the meetings and procedure for demand for poll at a general meeting
►The provisions relating to general meetings shall not apply to private companies
Exemption
unless the AOA of the company states otherwise
Private companies can now
Impact
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►Have flexible rules in their AOA for reaping the benefits of the exemptions provided, which are similar to what was available under the Companies Act, 1956
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Exemptions Restrictions on powers of the Board Board can exercise the following powers only after obtaining special resolution by members in a general meeting ► Sell, lease, dispose of the whole or substantially the whole of the undertaking ► Invest and / or borrow monies
Existing Provision
► Remit, or give time for the repayment of, any debt due from a director ► Invest in trust securities the amount of compensation received by it as a result of any merger or amalgamation
►Shall not apply to private companies
Exemption Private companies can
Impact
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► Now carry out the transactions mentioned as above with just a resolution of the Board
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Exemptions Loans to directors Board cannot give loan or guarantee to
Existing Provision
► Any director of the company ► Any other person in whom the director is interested ►The above restrictions shall not apply to private company, if – (i) in whose share capital no other body corporate has invested any money (ii) 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,
Exemption
whichever is lower (iii) such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section Private companies can ► Now advance loan, including those represented by a book debt, to any of the directors or to any other person in whom the director is interested
Impact
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► now give any guarantee or provide any security in connection with any loan taken by a director or such other person in whom the director is interested Subject to compliance with above exemptions
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Exemptions Related party transactions The Board cannot enter into RPTs except by way of ►Resolution by Board of Directors
Existing Provision
►Special resolution by members in certain cases where the value of transaction exceeds limits as specified in the Act Related members cannot vote in the general meeting ►The above provisions shall not apply to private company and the following will not be treated as related party – (i) a holding, subsidiary or an associate company of such company
Exemption
(ii) a subsidiary of a holding company to which it is also a subsidiary
►Interested members of a private company can now participate and vote at general meetings on matters requiring approval for RPTs
Impact
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►Private companies’ transaction with its holding company, its subsidiary, fellow subsidiary or with its associate company no longer qualify as RPT
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Exemptions Appointment and remuneration of MD, WTD and Manager ► Appointment of MD, WTD and manager was subject to stringent compliances for a private company considering the mandate to fix terms of remuneration and having shareholders resolution
Existing Provision
► Further, such appointments also required Central Government approval in case appointment is in variance to the conditions specified in the Schedule V
►Private companies are exempted from the above constraints
Exemption Private companies can now ► Appoint MD, WTD and Manager without shareholders approval
Impact
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► Do away the requirement of obtaining Central Government approval
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Exemptions Issue of ESOP
Existing Provision
►The further issue of shares to employees under a scheme of ESOP, can be made only after obtaining approval of the members by way of special resolution passed by majority not less than 75% of members who are entitled to vote
►Special resolution is done away with and now requires only ordinary resolution from members
Exemption ►The further issue of shares to employees under a scheme of ESOP, can be made after obtaining approval from shareholders by way of ordinary resolution passed by more than 50% of members who are entitled to vote
Impact
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►However, all other compliances with respect to issue of ESOP would continue to apply as prescribed in the Act
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Exemptions Restriction on giving loan by company for purchase of its shares
Existing Provision
►A company was restricted to give loans for the purchase of its own shares
►Private companies now exempted from this restriction, if – (i) No other body corporate has invested any money in company’s share capital (II) If the borrowings of the company from banks or financial institutions or any body corporate is less than twice its paid up share capital or fifty crore rupees,
Exemption
whichever is lower (iii) The company is not in default in repayment of such borrowings subsisting at the time of making transactions under this section ►The possibility of private companies being able to do treasury operation can be evaluated ►However, there is lack of clarification if buying one’s own shares amount to buy-back and the same needs to be extinguished
Impact
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Exemptions Acceptance of Deposits from members
Existing Provision
Exemption
►Every company inviting or accepting deposit were required to issue circular for acceptance of deposits from members, file a copy of the same with ROC, create deposit repayment reserve, obtain deposit insurance, etc
►The above provisions shall not apply to private companies which are accepting deposits from their members, which is not exceeding one hundred percent of aggregate of the paid up share capital and free reserves
►Deposits accepted from members, totaling up to 100 percent of paid up share capital and free reserves, need not comply with above mentioned procedures
Impact
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►However, ROC filings for such acceptance and annual disclosures shall continue to be done
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Exemptions Filing of resolutions
Existing Provision
►Private companies were required to file resolutions with ROC passed in respect of certain transactions, such as for approving amalgamation, buyback, approving financials, etc.
►Private companies are exempt from filing the resolutions with ROC for the above mentioned matters
Exemption ►The doing away of procedural requirement of filing Board resolution has eased up the compliance requirements and also the Board can now keep away certain internal management documents from public domain
Impact
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Exemptions Auditor’s eligibility
Existing Provision
►Private companies, irrespective of their paid up capital, were considered for computing the total number of companies for appointing an auditor
Exemption
►One person companies, dormant companies, small companies and private companies having paid-up share capital less than INR 100 crores are exempted from being considered for the total number of companies for auditor’s appointment ►Private companies can now appoint a Chartered Accountant or a firm of Chartered Accountants as the statutory auditor, in spite of they having been appointed in over 20 companies as long as such other companies are falling under the above mentioned exemptions
Impact
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►Restrictions imposed by Institute of Chartered Accountants of India shall continue to apply
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Exemptions Candidature of non-retiring director for directorship
Existing Provision
►A person not being a retiring director was required to deposit an amount of INR 1 lakh along with the consent to act as director (candidature letter) at least 14 days prior to the date of the general meeting
►A person applying for candidature in a private company need not give consent letter and deposit the sum as prescribed above
Exemption ►It is now easier to appoint non-retiring directors in a private company without having any procedural difficulties
Impact
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Exemptions Interested director’s participation in Board meeting
Existing Provision
►A director was required to disclose the matters in which he is interested, taken up in a Board meeting; and was also not allowed to participate in such discussions
►For a private company, an interested director can disclose his interest and participate in the discussions in the Board meeting
Exemption ►Promoter directors of a private company can now participate in Board meetings in which they are interested after they disclose their interests in the matters to be dealt with
Impact
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Exemptions Appointment of more than one director in a single resolution
Existing Provision
►No company was allowed to appoint more than one director vide a single resolution passed in a general meeting, unless an unanimous approval for such proposal was taken by the members in the general meeting
►Private companies can now appoint more than one director in a single resolution in a general meeting
Exemption ►Reduction in procedural implementation
Impact
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Summary The amendments and exemptions are a welcome change to the corporates in India. The Amendment Act is primarily aimed at easing the compliance requirement for setting up and continuance of business in India. The notification providing exemptions is of particular relevance to Indian subsidiaries of foreign companies which are constituted as private companies, targeted at reducing the procedural hardships Given the post amendment / exemption regulatory scenario, this should be an opportunity for the corporates to revisit their organization structures and transactions to tune it in line with eased compliances. Also, corporates can explore the possibility to amend their charter documents, Memorandum and Articles of Association, to suitably reap the benefits made available under these notifications.
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Thank You! The purpose of this presentation is to make the reader aware of the regulatory changes brought about by the MCA. The compilation is neither intended to be exhaustive nor a substitute for detailed research or exercise of professional judgment It may be noted that for the sake of brevity, a very brief description of relevant provision is provided in this document. Readers are requested to refer to the full text of the provisions and relevant rules for comprehensive understanding
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