Private Limited Company Exemptions

By Trademark Bazaar - 16th November 2017

Private Limited Company Exemptions

Ministry of corporate affairs has granted certain relaxations to the private limited vide notifications 2015 and 2017 in order to reduce the compliance requirement and provide them operational flexibility

The rules and regulation for private limited companies are specified in Companies Act 2013.Under this Act number of restrictions was levied on the Private Limited Company. Due to which the owners of private limited company raised concerns.

In order to provide a relief to the private limited company initially an exemption notification was released on 5th June 2015 followed by additional exemptions notification released on 13th June 2017. The Following exemptions were granted to the private limited company through both the notifications-

  1. Preparation of cash flow statement- After the notifications was released the private limited companies which are startups are no longer prepare cash flow statement.
  2. Minimum share Capital- The requirement of minimum share capital for private limited company was also removed. Thus no minimum share capital is required to incorporate a private limited company.
  3. Related Party Transactions- Through the exemption notification the definition of the related party was modified for private limited companies. Due to which the following are excluded from the definition of related party-

 (a) Holding companies

 (b) Subsidiary companies

 (c) Associate companies

 (d) Subsidiaries of holding companies of the private limited company.

 Thus, transactions of a private company with Exempted Entities will not be considered to be a "related party transaction" and will not require compliance with the provisions of Section 188 of the 2013 Act. Further, the related parties were not permitted to vote at a general meeting of shareholders for a resolution to approve any contract or arrangement between the company and a related party. Through the Exemption Notification, this restriction will also be removed from the private limited company.

  1. Kinds of Share Capital- Earlier private limited could only issue only two kinds shares i.e equity shares and preference shares. This restriction was removed through the exemption list issued. Thus now private limited companies are free to issue equity shares with differential rights.
  2. Accepting deposits from members- The companies Act 2013 permits all kinds of companies to accept deposits from their members subject to the fulfillment of certain conditions. After the exemption list was released these restrictions do not apply to the private limited companies accepting deposits from members which are less than 100% of its paid- up share capital and free reserves.  However, the private companies are required to file the details of such deposits received from the members with the registrar of companies in the prescribed manner.
  3. Loan to directors- Earlier as per the provision of section 185 of the companies act 2013 no company could advance loan to its directors or any person in which director is interested. Further, it prohibits giving any kind of guarantee or providing any security in connection with any loan that the directors avail in their personal capacity. However, now an exemption is being granted to the private limited companies for granting loans if they satisfy the following conditions-

• There shall be no other body corporate shareholder in the lending company

• 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

• Such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this Section.

  1.  Auditors’ Eligibility and Audit committee-Now it is not mandatory for private limited companies to form an audit company. Further, earlierthe restriction was imposed by section 141 of companies Act 2013 to the auditing firms, partner or the partnership firms. The auditor who is in full time employment elsewhere or in the capacity as auditor of more than 20 companies at the date of appointment or reappointment shall not eligible to be appointed as auditor of the company.

The exemption notification has modified this restriction. Now the appointment of a person as an auditor of one person companies, dormant companies, small companies; and private limited companies having a paid up share capital of less than Rs. 100 Crore may appoint its Auditor irrespective of the limit of 20 audits provided earlier.

  1. Appointment of managing director, whole time director or manager- As per the sections of companies Act any appointment of the Senior Management by the board of directors shall be subject to the approval of shareholders at a general meeting. The companies appointing Senior Management are also required to comply with the prescribed terms and conditions. In case of failure to comply with the terms and conditions specified in Schedule V, the approval of the central government is required to be obtained by the relevant company.

Through the exemption list, this restriction is not applicable to the private limited companies.Further, filing of Form MR-1 is also not applicable after the exemption.

  1. Disclosure of Interest-Earlier the director were required to disclose his interest in the company with whom a contract and arrangement is entered if he is directly or indirectly is in association with that company. Further, he was not allowed to participate in a meeting of the board where discussion of this contract or arrangement is held. Through the exemption list, the interested directors were allowed to participate in the meeting where such contracts or agreements are discussed.
  2. Nomination and Remuneration Committee-Now,in case of private company constitution of Nomination and Remuneration Committee is not mandatory.

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