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Implications of New Companies Act 2013 for Private Companies

The main change in the definition  of a private company is in the increase in the limit of the number of members from 50  to 200 . Secondly, the definition  does not state that a company inviting or accepting deposits from persons other than its members, directors or their relatives cannot  be a private company.  (section  2(68) of the 2013 Act).

Certain requirements which were till now applicable  to public companies or subsidiaries of public companies have now been also extended to private companies . Some such requirements include the following:

•   Section 90 of the 1956 Act, which was a saving section for private companies, has not been incorporated in the 2013 Act, thus making the provisions relating to the various kind of share capital and voting rights applicable  to private companies. Also refer Chapter: Setting up of a Company (share capital and debentures)

•    Provisions for the appointment of managerial personnel, in section 196 of the 2013 Act, are also applicable  to private companies.

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Therefore, the following requirements are now applicable  to private companies:

—   The re-appointment of a managerial person cannot  be made earlier than one  year before the expiry of the term. However, the term for which the managerial personnel can be appointed is five years

—   The eligibility criteria for the  age limit has been set between 21  to 70 years. An individual above the age of 70 years can also be appointed as the key managerial personnel by passing a special resolution.

—   In addition, private companies have the option to adopt principle of proportional representation for appointment of directors (section  163 of the 2013 Act).

•   The 2013 Act restricts certain powers of the board of private companies, which can be exercised only with the company’s consent by a special resolution. Some powers thus restricted are  as  follows :

—   To sell, lease or otherwise dispose of the whole or substantially the whole of the company’s undertaking

—   To borrow money in excess of the aggregate of its paid-up share capital and free reserves

•   The requirements relating to corporate social responsibilities are also applicable  to private companies since the criteria is based on specified levels of the net worth, turnover and net profit. However, it is of relevance to note, that while private companies are not required to appoint  independent directors as per section 149 of the 2013 Act, the section on CSR, requires  companies within the specified thresholds to constitute a corporate social responsibility committee consisting of three or more directors, out of which

at least one director must  be an independent director. This requirement appears to be contradictory to the extent that the section applies to private companies. Also refer Chapter: Corporate Social Responsibilities

•   Private companies would now be required to comply with the requirements for inter-corporate loans as well as  investments, which were hitherto not applicable. Also refer Chapter : Directors  (Meetings of the Board and its Powers – Loans and investments by a company)

•   The provisions relating to the appointment of the managing director, whole-time director or manager are also applicable  to private companies. Refer Chapter : Directors  (Appointment and remuneration of managerial personnel – Introduction)

•   For certain other compliance requirements, refer to Chapter: Directors (General – Additional compliance requirements for private companies)

There is a marked increase in the compliance requirements mandated for private companies under the

2013 Act. While some of these will go a long way in increasing the accountability of private companies, there are also concerns as to the need for increasing the complexities in private companies in which the public at large is not interested.

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