PUNE CHAPTER WIRC OF ICSI - PowerPoint Presentation

1. PUNE CHAPTER WIRC OF ICSI25 JULY 2015CS SACHIN BHAGWAT

2. EXEMPTIONS TO PRIVATE COMPANIES

3. “Counsel have drawn our attention to the extremely unsatisfactorily drafting of this Act and we must confess that many of its provisions do not suffer from lucidity. We have been told that the new Act has raised many problem for those who have anything to do with the management or running of companies, and the problems brought before us are only a few of those which have arose in practice.......

4. ......It seems to us unfortunate that a law which is intended to help in the development of companies in our country and also to put down abuses which were noticed in the working of companies ….. should not have been couched in clear and more precise language. That, however, is a matter for Parliament. Our concern is to take the law as we find it and do the best we can.” [Chagla J. in Ramanben Thanawala v Jyoti Ltd. (1957) 27 CompCas 105 ]

5. Clause 2“The Private companies, while complying with such exceptions, modifications and adaptations…. shall ensure that the interests of their shareholders are protected.”Notification 464 (E) – 5 June 2015

6. Sub-clause (viii) of Clause (76) of Sec 2 shall not apply with respect to section 188. Second Proviso to Section 188(1) shall not applyTransactions of a Private company with Holding company / subsidiary / associate company / co-subsidiary outside the purview of related party transactions u/s 188The Related Party permitted to vote on “Non-OCB and Non-AL” transactions with the Private Company exceeding threshold limits Sec 2(76)(viii) – Related Parties

7. A Private company can without any consent or approval, enter into prescribed transactions with its Holding company / subsidiary / associate company / co-subsidiary even if such transactions are not in OCB or at ALIn respect of transactions of a private companies with ‘other related parties’, not in OCB and AL, the related party concerned is entitled to cast vote at the general meetingEffect of exemption – Related Parties

8. Sec 43 shall not apply where Memorandum or Articles so providePrivate company can define ‘Kinds of share capital’ to suit its needs – “Status quo ante” restoredNeed not comply with the Rules prescribed for issue of shares with differential rightsShould a private company include specific clause in its Memorandum OR Articles to specify that Sec 43 shall not apply? If so, what type of amendment can be made to the Memorandum?Section 43 - Kinds of Share Capital

9. Will it suffice if the Articles state that Sec 43 shall not apply? - NOCompany needs to specifically define the Kinds of Share Capital in the ArticlesPrivate company can have Share capital to suits its needs – Example - 0% Preference shares OR NO preference as to dividend but with respect to repayment of capital possibleSection 43 - Kinds of Share CapitalContd..

10. Sec 43 shall not apply where Memorandum or Articles so provideNeed to include specific clause in the Memorandum OR Articles to specify that Sec 47 shall not apply? If so, what type of amendment can be made to the Memorandum?Section 47 - Voting rights

11. Will it suffice if the Articles state that Sec 47 shall not apply? - NONecessary to define voting rights of the classes of shareholdersPossible to have EQUAL voting rights for all classes of shares or disproportionate voting rights for different classesSection 47 - Voting rights ..contd

12. Further issue of capital - Sec 62(1)(a)(i) and (2)

13. Consent to be obtained in “WRITING” or “IN ELECTRONIC MODE”Exemption from sub-sec (2) is limited to the time specified; NOT the MODE of dispatch of offer letter. Hand delivery / Courier not permittedCan the consent be obtained after dispatch of the Offer letter?Impact - Section 62(1)(a)(i) and 2 ..contd

14. Issue of further shares to Employees pursuant to ESOPs by ORDINARY instead of SPECIAL resolutionIs an offer of shares to Employees pursuant to ESOP a Private placement u/s 42? If yes, Sec 42 requires Special Resolution.Sec 62(1)(b) - ESOPs

15. Purpose of exemption to specified private companies not clear because Sub-sec (2) does not apply to private companies.Sub-sec (1) puts restrictions on buying own shares unless share capital is reduced as per the Act, which is anyway not required due to the “non obstante clause” in Sec 68Context vis-à-vis Sec 77 and 77A of CA 1956Section 67 – Purchase of own shares

16. Exemption is specific to compliance of Conditions in clauses (a) to (e) onlyPrivate companies permitted to accept deposits from members upto 100% of paid up share capital and free reservesCompany to file the details of money accepted with the Registrar in such manner as may be prescribedSection 73(2) – (a) to (e) – Deposit from Members

17. Exemption does not extend to sub-sec (2), it is limited to the following:Not to issue and file Circular (DPT-1) with ROCNot to deposit specified percentage of deposits maturing in bank account (DRR Account)Not to provide deposit insuranceNot to certify “No default” in repaying deposits or interest thereonDeposit from Members.. contd

18. Compliance required to be done u/s 73(2)Pass a special resolutionPeriod of deposits cannot be less than 6 months and more than 3 yearsDeposits less than 3 months restricted to 10% of aggregate of paid up share capital and free reservesRate of interest restricted as specified in the RulesCan the terms of deposits be altered to the prejudice of deposit holders?Deposit application form mandatory, which contains a declaration that the deposit is not being made out of borrowed moniesDeposit receipt to be issued. Deposit Register to be maintainedDeposit Return to be filedDeposit from Members.. contd

19. Private company can provide in the Articles its own Rules for issuing notice of general meetings. status quo ante restored.Exemptions: - Mandatory notice of 21 days - Consent for short notice of 95% of members - Notice to legal representative of a member / auditor/ directors Sec 101 – Notice of meeting

20. Articles must contain express provision for availing exemption – status quo ante restoredNo need to annex Explanatory StatementSec 102 - Explanatory Statement

21. Articles must contain express provision for availing exemption – status quo ante restoredSuch companies can provide in its Articles that a person present through proxy shall be counted for quorumSec 103 - Quorum

22. Articles must contain express provision for availing exemption – status quo ante restoredFreedom to have provision in Articles regulating proxies such as Proxies can speak at the meeting and can vote on show of handsSec 105 - Proxies

23. Articles must contain express provision for availing exemption – status quo ante restoredArticles may contain a provision that sense of the meeting can be ascertained only by PollSec 107 - Voting by show of hands

24. Articles must contain express provision for availing exemption – status quo ante restoredArticles may provide a higher threshold for demanding PollSec 109 - Demand for Poll

25. Board Resolutions passed under Section 179 (3) and under Rule 8 of relevant Rules to be filed with RegistrarCaution: Need to file resolution of appointment of a Managing Director [See Sec 117(3)(c)] Section 117(3)(g) – Board resolutions filing with ROC

26. Number of companies of which a person or partner of a firm can be an auditorFreedom to be an Auditor in - OPCs, dormant, small companies and private companies having paid up share capital less than 100 crore – without restriction on the numberSection 141(3)(g) - Audit

27. Right of persons to stand for directorshipHuge relief for private companies in terms of mandate of deposit to be kept. Section 160

28. No special resolution needed to sell undertaking, invest otherwise in trust securities the amount received on merger, borrowing in excess of paid up capital and free reserves or to give time to a director to repay debtNo need to bother about determination of what is an “undertaking” Section 180 – Powers of Board

29. An ‘interested director’ of a private company is permitted to participate in the meeting if he makes disclosure of his interest or concern in the contract at the meeting. Can such Director ‘Vote’ on the resolution?Section 184(2) – Participation of Interested Director

30. Restrictions of giving of loan, guarantee or security to any specified person do not apply to the following Private companies only: - No body corporate has invested in the share capital - If the private company’s borrowings from Banks / FIs or any body corporate is less than LOWER of its paid up capital and Rs. 50 Cr. - If the Private company has no default in repayment of such borrowings subsisting at the time of making transaction Section 185- Loans

31. Private companies exempted from the following approvals:Board and Shareholders approvalCentral Government approval if the conditions of Schedule V are not fulfilled However, the term of appointment prescribed in sub-sec (2), Age limits prescribed in sub-sec (3) will have to be adhered toSection 196 (4) & (5) – Appointment of MD/WTD/Manager

32. Common Seal: Made optional “So far as the question of putting up of the seal of the Company is concerned, it is a relic of the days when mediaeval barons, who could not read or write, used their rings to make a characteristic impress. Even in absence of a seal, the Company may still be held to be liable having regard to the nature of transaction and the authority of those who had executed it.” [Supreme Court – (2006) Comp Cas 131 (577)] Suggestion: Board should authorise two Directors or any Director and Company Secretary to authorise any person to execute other deeds as the Company’s attorney.Companies (Amendment) Act 2015

33. Section inserted to provide for penalty for contravention of provisions relating to DepositsProvision prospective. Any violations of Sec 73 or 76 between April 1, 2014 and May 25, 2015 shall NOT attract penalty prescribed under Sec 76A Section 76A – Penalty provided

34. Mandatory setting off of carried over previous losses and depreciation not provided in previous years before declaring dividendThis was provided under Rule 3(5) of Companies (Declaration and Payment of Dividend) Rules 2014 which has was deleted on 29 May 2015Sec 123 – set off provision added

35. Companies are exempted from obtaining approval of shareholders if the transactions prescribed in sub-sec (1) are between holding company and its wholly owned subsidiary.No relevance for Private companies as subsidiaries are not “related parties” with reference to a private company Sec 188 – Related Party transaction

36. Thank you !