25 JULY 2015 CS SACHIN BHAGWAT

 “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

......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 ]

Clause 2 “The Private companies, while complying with such exceptions, modifications and adaptations…. shall ensure that the interests of their shareholders are protected.”

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 apply  Transactions of a Private company with Holding company / subsidiary / associate company / co- subsidiary outside the purview of related party transactions u/s 188  The Related Party permitted to vote on “Non-OCB and Non-AL” transactions with the Private Company exceeding threshold limits

 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 AL  In 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 meeting

Sec 43 shall not apply where Memorandum or Articles so provide  Private company can define ‘Kinds of share capital’ to suit its needs – “Status quo ante” restored  Need not comply with the Rules prescribed for issue of shares with differential rights  Should 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?

 Will it suffice if the Articles state that Sec 43 shall not apply? - NO  Company needs to specifically define the Kinds of Share Capital in the Articles  Private 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 possible

 Sec 43 shall not apply where Memorandum or Articles so provide  Need 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?

 Will it suffice if the Articles state that Sec 47 shall not apply? - NO  Necessary to define voting rights of the classes of shareholders  Possible to have EQUAL voting rights for all classes of shares or disproportionate voting rights for different classes

90% members’ consent required Offer acceptance period can be less than 15 / 30 days Offer can be dispatched less than 3 days before opening of issue

 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 permitted  Can the consent be obtained after dispatch of the Offer letter?

 Issue of further shares to Employees pursuant to ESOPs by ORDINARY instead of SPECIAL resolution  Is an offer of shares to Employees pursuant to ESOP a Private placement u/s 42? If yes, Sec 42 requires Special Resolution.

 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 68  Context vis-à-vis Sec 77 and 77A of CA 1956

 Exemption is specific to compliance of Conditions in clauses (a) to (e) only  Private companies permitted to accept deposits from members upto 100% of paid up share capital and free reserves  Company to file the details of money accepted with the Registrar in such manner as may be prescribed

 Exemption does not extend to sub-sec (2), it is limited to the following: ◦ Not to issue and file Circular (DPT-1) with ROC ◦ Not to deposit specified percentage of deposits maturing in bank account (DRR Account) ◦ Not to provide deposit insurance ◦ Not to certify “No default” in repaying deposits or interest thereon

 Compliance required to be done u/s 73(2) ◦ Pass a special resolution ◦ Period of deposits cannot be less than 6 months and more than 3 years ◦ Deposits less than 3 months restricted to 10% of aggregate of paid up share capital and free reserves ◦ Rate of interest restricted as specified in the Rules ◦ Can 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 monies ◦ Deposit receipt to be issued. Deposit Register to be maintained ◦ Deposit Return to be filed

 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

 Articles must contain express provision for availing exemption – status quo ante restored  No need to annex Explanatory Statement

 Articles must contain express provision for availing exemption – status quo ante restored  Such companies can provide in its Articles that a person present through proxy shall be counted for quorum

 Articles must contain express provision for availing exemption – status quo ante restored  Freedom to have provision in Articles regulating proxies such as Proxies can speak at the meeting and can vote on show of hands

 Articles must contain express provision for availing exemption – status quo ante restored  Articles may contain a provision that sense of the meeting can be ascertained only by Poll

 Articles must contain express provision for availing exemption – status quo ante restored  Articles may provide a higher threshold for demanding Poll

 Board Resolutions passed under Section 179 (3) and under Rule 8 of relevant Rules to be filed with Registrar  Caution: Need to file resolution of appointment of a Managing Director [See Sec 117(3)(c)]

 Number of companies of which a person or partner of a firm can be an auditor  Freedom 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 number

 Right of persons to stand for directorship  Huge relief for private companies in terms of mandate of deposit to be kept.

 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 debt  No need to bother about determination of what is an “undertaking”

 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?

 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

Private companies exempted from the following approvals:  Board and Shareholders approval  Central 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 to

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.

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

 Mandatory setting off of carried over previous losses and depreciation not provided in previous years before declaring dividend  This was provided under Rule 3(5) of Companies (Declaration and Payment of Dividend) Rules 2014 which has was deleted on 29 May 2015

 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