What are the procedural exemptions to private companies

It is interesting to note the timing of the announcement of the exemptions to private companies in the Companies Act, 2013 (“Act”) this year considering the allegations surrounding various private entities with alleged links to the country’s political corridor.

For the sake of convenience, it would be both practical and beneficial to examine these exemptions in three parts owing to the voluminous content. The notification was made effective from June 5, 2015. This article deals only with the procedural changes with regard to the exemptions provided.

Lowering time period to reply to notice for further issue of share capital (Section 62)

Section 62 has been amended to bring in greater flexibility. The time limit specified in the section to respond to a notice may be shortened (15 to 30 days) if 90 per cent of the members of the company provide their consent for this change. So, if there are 100 members and 90 of them agree that there should be five days only to respond to a notice accepting/declining an offer, then it may be implemented. This helps cut down the time period and could only be a concern if the remaining 10 shareholders have an issue with it. However, in many private companies, it is rare to have small shareholders comprising less than 10 per cent of the shareholding. This change benefits smaller companies with immediate capital requirements, which can close investment transactions at a faster rate.

Ordinary resolution for ESOPs

The law to issue stock options is governed by Section 62 (1)(b) of the Act and by Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. Private companies are now exempt from ‘passing a special resolution’. Instead, the issue further share capital through ESOPs requires only an ordinary resolution. The red flag here is that the corresponding rule has not been amended. Rule 12 still necessitates a special resolution for issuance of ESOPs.

Although the substantive provisions of the Act would override the rules in accordance with the principles of statutory interpretation, the MCA should still consider amending the rules to ensure consistency.

Appointments

(a) Auditors

The new Act provides that an auditor cannot be associated with more than 20 companies (refer to section 141(3)(g). However the auditor of a private company may exclude one-person companies, dormant companies, small companies, and private companies with a paid-up share capital of less than one hundred crore rupees, from the ambit of the 20 company restriction. The message that is being sent out is that such types of companies do not require a significant amount of time of an auditor’s.

(b) Directors

The new Act provides that in the event a company wishes to appoint two or more people as Directors under one resolution, it is necessary that the shareholders first agree to it. Private companies are now exempt from this requirement. In other words, a simple vote could also decide the appointment of two or more directors through a single resolution. This implies less paperwork.