Amendment in Companies Deposit Rules 15-9-2015

Welcome amendment clause in the Deposit scheme for Companies

"(viii) any amount received from a Person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company:

Provided that the director of the company or relative of the director of the private company, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Board's report;"'

EXEMPTIONS TO PRIVATE COMPANIES Jnue 2015

EXEMPTIONS TO PRIVATE COMPANIES UNDER Companies Act, 2013

[AS PER MCA CIRCULAR DATED 05 JUNE, 2015]

Background

The Companies Act, 2013 is cumbersome, complicated, threatening. Small business houses, in particular private limited companies have discovered that compliances are extremely difficult, costly and practically impossible.

Last one and half year, has seen many private companies opting simplified exit schemes or getting converted into LLP mode. Almost all chambers and entrepreneurial associations submitted memorandum to Ministry of Corporate Affairs about impracticability of the dreaded provisions.

After thorough discussions at cross platforms, Government came out with some reliefs for private limited companies vide notification no. G.S.R. 464(E) dated 05th June, 2015.

Government have provided certain exemptions to Private Companies in Companies Act, 2013. After going through these exemptions, any professional will conclude that it is too little and too late. Another inference which can be drawn that soon new set of exemption will happen in case of private limited companies.

As per MCA Circular dated 05th June, 2015, Various exemptions are provided to Private Limited Companies other than subsidiary of Public Company which makes the corporate affairs of Private Limited Company more flexible as compared to prior exemption period.

Exemptions

The exemptions are detailed as under-

• Chapter IV, Section 43 & 47-

EARLIER

Companies Act, 2013 restricted the ability of private companies in issuing shares with differential rights by prescribing conditions related to quantum (should not exceed 26% of post-issue paid-up capital), past performance (the company should have had a consistent track record of distributable profits in the 3 previous years) and past compliance (non-contravention of certain statutory provisions), among others.

NOW

Private companies need not to comply with such conditions subject to memorandum or articles provide so.

In other words, if anything mention in the Memorandum and Article regarding Section 43 and 47 of the Companies Act, 2013 then MOA & AOA will prevail over these sections.

• Chapter IV, Section 62(1)(a)(i) and (2)-

EARLIER

The offer for right issue shall be made by notice specifying the number of shares offered but receipt of subscription money not allowed prior to fifteen days.

NOW

In case 90% of the members of private company have given their consent in writing or in electronic mode then the period lesser than 15 days is possible but upper limit of the period remains same, i.e. 30 days.

Chapter IV, Section 62(1)(b)

EARLIER

A Company having a share capital proposes to increase its subscribed capital can issue shares under employees’ stock option but after passing special resolution in general meeting.

NOW

Private Companies are now allowed to proceed to issues employees’ stock option plan with passing of ordinary resolution.

• Chapter IV, Section 67-

EARLIER

No company limited by shares or by guarantee and having a share capital shall have power to buy its own shares or of giving loans by it for purchase of shares.

NOW

This provision is not applicable to Private Companies, subject to compliance of three conditions-

1. in whose share capital no other body corporate has invested any money;
2. if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice its paid up share capital or fifty crore rupees, whichever is lower; and
3. such a company is not in default in repayment of such borrowings subsisting at the time of making transactions under this section.

• Chapter V, Section 73(2)(a)(e)-

EARLIER

As per Section 73 of the Companies Act, 2013, Private Companies can accept deposits from the member after-

• Passing special resolution in general meeting;
• Issue Circular to members;
• Filing circular with ROC;
• Providing Deposit Insurance;
• Maintain Deposit repayment reserve;
• Certifying that Company has not committed any default in repayment of deposits.

NOW

This Provision is now not applicable to Private Companies which accepts from its members monies not exceeding one hundred percent of aggregate of the paid up share capital and free reserves.

In other words, Private Companies can accept deposit from the members up to one hundred percent of aggregate of the paid up share capital and free reserves. But Government has reserved rights to specify filing of return (as may be prescribed) for such deposits.

• Chapter I, Sub Clause (viii) of clause (76) of Section 2-

EARLIER

Related Party, with reference to a company, means:

Any company which is—

• a holding, subsidiary or an associate company of such company; or
• a subsidiary of a holding company to which it is also a subsidiary;

NOW

Holding, Subsidiary and Associate Companies are outside the ambit of section 188 of Companies Act, 2013.

• Chapter VII, Section 101 to 107 and section 109-

EARLIER

IN relation to General Meeting, the provisions of Section

101 – Notice of meeting

102 – Statement to annexed to notice

103- Quorum for meeting

104- Chairman of Meeting

105- Proxies

106 – Restriction on Voting Rights

107- Voting by Show of Hands

109 – Demand for Poll

shall apply to Private Limited Company.

NOW

If AOA provides for provisions other than those mentioned in such sections then provisions of Sections will not apply.

• Chapter VII, Section 117(3)(g)-

EARLIER

It was required to File Form MGT-14 (Filing of Resolutions and Agreements with ROC) in respect of Resolutions passed in pursuance of sub-section (3) of section 179 provided for filing of MGT 14 in following events:

• to make calls on shareholders in respect of money unpaid on their shares;
• to authorise buy-back of securities under section 68;
• to issue securities, including debentures, whether in or outside India;
• to borrow monies;
• to invest the funds of the company;
• to grant loans or give guarantee or provide security in respect of loans;
• to diversify the business of the company;
• to approve amalgamation, merger or reconstruction;
• to take over a company or acquire a controlling or substantial stake in another company;
• to make political contributions;
• to appoint or remove key managerial personnel (KMP);
• to appoint internal auditors and secretarial auditor;

NOW

There is no requirement to file Form MGT-14 (Filing of Resolutions and Agreements with ROC) in respect of Resolutions passed in pursuance of sub-section (3) of section 179 and relevant rule.

In other words, Provisions to this section is not applicable to private Limited Company.

• Chapter X, Section 141(3)(g)-

EARLIER

A person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies shall not be eligible for appointment as an auditor of a Company.

NOW

Now the limit of twenty companies does not include the following:

1. One person Companies;
2. Dormant Companies;
3. Small Companies;
4. Private companies having paid-up share capital less than one hundred crore rupees.

• Chapter XI, Section 160-

EARLIER

A person who is not a retiring director in terms of section 152 shall, subject to the provisions of this Act, be eligible for appointment to the office of a director at any general.
If he, or some member intending to propose him as a director, has, not less than fourteen days before the meeting, left at the registered office of the company, a notice in writing under his hand signifying his candidature as a director or, as the case may be, the intention of such member to propose him as a candidate for that office, along with the deposit of one lakh rupees or such higher amount as may be prescribed which shall be refunded to such person or, as the case may be, to the member.

if the person proposed gets elected as a director or gets more than twenty-five per cent of total valid votes cast either on show of hands or on poll on such resolution.

NOW

This provision is not applicable to Private Companies i.e. there is no need to deposit Rs. 100,000/- by the director at the time of appointment.

• Chapter XI, Section 162-

EARLIER

At a general meeting of a company, a motion for the appointment of two or more persons as directors of the company by a single resolution shall not be moved unless a proposal to move such a motion has first been agreed to at the meeting without any vote being cast against it.

NOW

This provision is not applicable to Private Companies i.e. more than one director can be appointed through single resolution.

• Chapter XII, Section 180-

EARLIER

The Board of Directors of a company shall exercise the following powers only with the consent of the company by a special resolution-

• to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings;

• to invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation;

• to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business;

• to remit, or give time for the repayment of, any debt due from a director.

NOW

There is no need to pass special resolution in respect of resolution passed pursuance to section 180 of the Companies Act, 2013.

• Chapter XII, Section 184(2)-

EARLIER

Interested director cannot attend and vote on the resolution passed related to Disclosure of Interest pursuant to section 184(2) of Companies Act, 2013.

NOW

Interested director can participate in such meeting after disclosure of his interest.

• Chapter XII, Section 185-

EARLIER

No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him.

NOW

This provision is not applicable to Private Companies-

1. In whose share capital no other body corporate has invested any money;
2. If borrowing of such a company from bank or financial institutions or any body corporate is less than twice of its paid up share capital of fifty crore rupees, whichever is lower, and
3. Such a Company has no default in repayment of such borrowings.

• Chapter XII, second proviso to sub-section (1) of section 188-

EARLIER

No member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.

NOW

This provision is not applicable to private companies i.e. Member can vote on such resolution passed under sub-section (1) of section 188, if member is a related party.

• Chapter XIII, sub-section (4) and (5) of section 196-

EARLIER

In relation to appointment of MD, WTD & Manager, following were mandatory:

• Special Resolution in General Meeting
• Compliance of Schedule V
• Filing of Form MR-1 (Return of appointment of MD/WTD/Manager)
• Terms and Conditions of Appointment need to be mentioned in the resolution.

NOW

Above requirement for the appointment of MD/WTD/Manager is not applicable for private companies.

Conclusion:

In conclusion, it can be said that Ministry of Corporate Affairs, Government of India brings more relaxations in compliances of the provisions of the Companies Act, 2013 as compared to other types of Companies. This makes the corporate affairs of private companies more flexible. But much more is still to be done for the sake of Ease of Doing Business policy of the Prime Minister

1. No minimum capital required to start a private limited company: LLP always had an edge over the private limited companies when it came to this clause. In India, one can start an LLP with Rs 1 as contribution whereas, earlier, for a private limited company a minimum capital of Rs 100, 000 had to be provisioned for.

Impact of this amendment:There is no minimum capital requirement and hence no burden of putting in such a large amount, as previously required, into the company bank account. This amount can be introduced as per the convenience of the business owners.

2. Introduction of Fast Track Mode of Incorporation:The Ministry of Corporate Affairs (MCA) introduced this new scheme, effective from 1st May, 2015. Now, instead of filing separate e-forms for allotment of Director Identification Number, Name of Company and Incorporation of a company, startups needtofile one single form, INC 29, to incorporate their company.Now startups have two options:

• The Fast Track Route: Filing of INC 29 with a fee of Rs2,000 in addition to the normal filing fees
• The Regular Route: with the normal filing fees

Impact of this introduction:

This initiative was brought in to incorporate companies in a couple of days.After incorporating around over 15 startups by this method, we have found that incorporation, in reality, takes around around five days . Nevertheless, this indeed is a huge improvement over the existing timeline of 15 to 20 days.

3. Exemption from Filing of INC 21: A newly formed company could not commence operations until it has filed with the RoC a declaration that the paid-up capital has been subscribed by the signatories to the Memorandum. Hence, technically, startups had only one option–deposit the Rs 100,000 as soon as the company gets incorporated.

Impact of this exemption:

This requirement has been done away with. Hence, there is no undue pressure on startups to subscribe to the shares immediatelyon incorporation. Startups, take a deep breath and kick-start your operation.

4. Acceptance of Deposits from Members:In India, private limited companies are generally formed as closely held companies. In these types of entities, loans and advances from relatives and members are the most important sources of finance. Companies Act 2013 made it practically impossible for startups to run their businesses by categorising loan from any party apart from directors of the company as “Deposits”. Moreover, the Directors were not allowed to advance such loans from borrowed funds. Companies accepting deposits were required to follow the rigorous provisions as applicable at par with the public limited companies, which included:

• Issuance of  Circular
• Filing of circular with ROC
• Maintaining Deposit repayment reserve
• Provision of  deposit insurance

Hence, the companies could take loans either from its directors or from banks. While it practically gets very difficult for directors to dish out personal resources, it also takes a lot of time and troubleto avail loans from banks. After numerous representations from various parties and councils, the Government has come up with a partial exemption.

Impact of this exemption:

Private Companies can now borrow money from members up to aggregate limit of paid-up share capital andfree-reserves. They would not need to comply with “Deposit”conditions. This in turn has again ensured the free flow of hassle-free resources.

5. Loans to Director: While private companies were not allowed to borrow money from any one apart from the directors, they were not allowed to advance money to anyone includingits directors. It was further prohibited for these entities to even provide guarantee for the loan that the directors availed intheir personal capacity. These provisions pertaining to loans faced severe criticisms.

 Impact of this exemption:

 A private limited company is now allowed to provide loan orguarantee/security to directors, subject to the following conditions:

• Such guarantor company should not have a body corporate as a shareholder
• Such company should not have borrowed money from bank/ financial institution/ body corporate exceeding twice its paid-up capital or Rs 50 crore, whichever is lower.
• No repayment default is subsisting of such borrowings at time of giving the loans

Few others notable exemptions to private limited companies include:

• Definition of Related Party relaxed: Holding, Subsidiary, Associate Company and sister concerns out of ambit.
• Minimum time limit for rights issue relaxed. Minimum offer period can be reduced, if 90% members give their consent in writing or electronic mode.
• Articles of Association may contain over-riding provisions to Companies Act pertaining to content andlength of notice, explanatory statement, quorum, chairman, proxies, restriction on voting right, show of hands and poll (subject to certain conditions).
• Interested directors can now participate in board meeting subject to the disclosure of their interest.

In all, the Government has summarised the pain points of the businesses and tried to bring about a restorative mechanism. While we consultants had our fair share of trouble resolving the practical difficulties of companies Act, 2013, the startups suffered the most. While measures like no minimum capital requirement would grease the entry points for starting up, relaxations in deposit norms and provision for loans would lubricate the maintenance of the businesses.

Section 185 - An indepth analysis

Section 185 - An indepth analysis

With the 98 Sections of the Companies Act, 2013 becoming effective from September 12, 2013 onwards, one section which has been the hottest topic for discussion amongst Corporates and professionals is Section 185 of the Companies Act, 2013 which deals with Loans to Directors etc. The section particularly prohibits grant of any loans, giving of guarantee or providing of any security to the directors or any other person in whom the director is interested; otherwise than for given exemptions. It is interesting to note that per se the Companies Act, 2013 is said to be more of self regulatory and liberal as compared to Companies Act, 1956 however, this Section 185 is one section which seems to be more stringent that its previous counterpart. The provisions of Section 185 of the Companies Act, 2013 with corresponds to Section 295 of the Companies Act, 1956 provides that:-

• No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.
   
• Exemptions under the section relate to:-
  • the giving of any loan to a managing or whole-time director if it is given as a part of the conditions of service extended by the company to all its employees; or pursuant to any scheme approved by the members by a special resolution; or
  • a company which in the ordinary course of its businessprovides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.
     
• Herein, the expression “to any other person in whom director is interested” means—
  • any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
  • any firm in which any such director or relative is a partner;
  • any private company of which any such director is a director or member;
  • any body corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
  • any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.