Exemptions to Private Company - First Shower of Monsoon - Part II

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1 Corporate Advisory Division Exemptions to Private Company - First Shower of Monsoon - Part II

2 Background Ministry on June 13, 2017, further to the notification dated June 5, 2015, has provided additional relaxations / modifications to the private companies (not being subsidiary of public company), on fulfillment of prescribed conditions. This notification issued by Ministry is yet another leading step in the Indian regulatory space towards the Ease on doing business agenda. Issued By - Ministry of Corporate Affairs Approved By - Central Government Dated - June 13, 2017 Notification Exemptions to Private Companies, further to the exemptions provided in notification dated June 5, 2015 This presentation includes an analysis on exemptions provided to the Private Companies

3 Applicability All exemptions, modifications and adaptations provided in the notification to private limited companies stand automatically withdrawn if they have defaulted in filing their Financial Statement under section 137 or their Annual Return under section 92 of the Companies Act. Large percentage of active companies still fail to file Financial Statements and Annual Return for the previous Year. With this notification issued, all these companies stand to lose significant exemptions they have been enjoying by virtue of being a private limited company.

4 Exemptions - At A Glance 01 No requirement of Cash Flow Statement in Financial Statements Conditions for taking deposits from Members dispensed Signing of Annual Return by Company Secretary/ Director only Holding of at least one Board meeting in each half of the FY with gap of not less than 90 days between two meetings No disclosure of remuneration drawn by Directors No requirement of statement on internal financial controls in Audit Report Interested Directors to be counted for the purpose of quorum in Board Meetings

5 Exemptions to Private Company Cash Flow Statement in Financial Statements [For Start-ups, OPC, Small Co. & Dormant Co.] Acceptance of Deposits by Members [For Start-ups & prescribed Private Companies] Chapter I, Clause (40) of section 2 Chapter V, Clause (a) to (e) of section 73(2) Financial Statements of Start-ups / OPC / Small Co & Dormant Co may not include Cash Flow Statement. Start Up means an entity, incorporated or registered in India satisfying following conditions: Not prior to seven years, however for Biotechnology Start-ups, not prior to ten years; With annual turnover not exceeding INR 25 crore in any preceding financial year; and Working towards innovation, development or improvement of products or processes or services or if it is a scalable business model, with a high potential of employment generation or wealth creation. Private Company may accept deposits from its members without fulfillment of the conditions specified in Sec 73(2), in case of A. Deposits not exceeding 100% of paid up capital, free reserves and securities premium OR B. Start-ups upto five years from the date of its incorporation; OR C. Private Company fulfills all below conditions : i. Not a associate / subsidiary of any other company ii. borrowings from Banks / FIs / corporate is less than twice of its paid up capital or fifty crore rupees, iii. whichever is lower; & has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under the section. However details of monies shall be filed with the Registrar in such manner as may be specified

6 Exemptions to Private Company Signing of Annual Return [For Start-ups, OPC & Small Co] Chapter VII, Proviso to section 92 (1) Annual Return of Start-ups / OPC & Small Co may be signed by the company secretary or where there is no company secretary, by the Director of the company only. Meeting of the Board [For Start-ups, OPC, Small Co. & Dormant Co.] Chapter XII, Section 173 ( 5). Start-ups / OPC / Small Co & Dormant Co shall be deemed to have complied with the provisions of Section 173(5) if: A. At least one meeting of Board of Directors has been conducted in each half of the financial year; AND B. the gap between the two meetings is not less than ninety days.

7 Exemptions to Private Company Disclosure of remuneration details in Annual Return [For Small Co] Chapter VII, Clause (g) section 92 (1) In case of Private Company, which is a small company, aggregate amount of remuneration drawn by Directors is not required to be disclosed in Annual Return. Internal Financial Controls [For OPC, Small Co. & prescribed Private Companies] Chapter X, Clause (i) of Section 143(3) Following companies have been granted exemption reporting on adequacy of internal financial controls system and operating effectiveness of such controls to have in their Auditor s Report, : 1. One Person Company 2. Small Companies 3. the Private Company which has a turnover of less than Rs. 50 Crore as per the latest Audited Financial Statements or which has an aggregate borrowing from Banks or FIs or any Body Corporate at any point of time during the financial year less than Rs. 25 Crore.

8 Exemptions to Private Company Quorum for Meeting [For all Private Companies] Chapter XII, Section 174 (3). In case of Private Companies, Section 174(3), shall apply with an exception that Interested Director would now be counted for the purpose of Quorum in Board meeting after disclosure of interest u/s 184. MCA vide its notification dated 5th June, 2015 has provided relaxation in terms of Section 184 of the Act leaving the ambiguity for the purpose of counting such Directors in the Quorum. However, by this notification, they have clarified in terms of Quorum too.

9 Overview Overview of Exemptions provided to Private Companies in all!... Exemptions granted to Private Companies under MCA Notification dated June 5, 2015 Related Partys definition narrowed in case of RPT; Related Parties can vote on RPTs; Interested Director can participate, if interest is disclosed; Norms for Deposits from members relaxed; Loan to Directors, etc. not prohibited for certain private companies; Rights Issue Offer period and notice period made liberal; Employees Stock Option Scheme could be passed by ordinary resolution; Requirement of filing the Board Resolutions passed under Section 179(3) is dispensed with; Limit of no of statutory audits relaxed; Provisions of approval of terms of appointment including remuneration of managerial personnel Section 196 (4 & 5) not applicable; Restrictions on purchase by company or giving of loans for purchase of its shares under Section 67 not applicable; Exemption for kinds of share capital and voting right thereto; No approval of members for borrowing beyond limits / sale of substantial undertaking / etc.; AoA to prevail over the provisions related to general meeting; Appointment of Directors by single resolution; and Procedural norms for nominating person for Directorship liberalized. Exemptions granted to Private Companies under MCA Notification dated June 13, 2017 Financial Statements of Start-ups / OPC / Small Co & Dormant Co may not include Cash Flow Statement; Prescribed private companies / Start-ups may accept deposits from its members without fulfillment of the conditions specified in Sec 73(2); Start-ups / OPC & Small Co, where there is no Company Secretary, Annual Return may be signed by the Director of the company ; Start-ups, shall conduct at least one Board meeting between April to September and October to March, such that the gap between the meetings is minimum 90 days. Hence, 2 Board meetings in one financial year deems sufficient compliance for Start-ups, like the case of OPC / small co and dormant co; In case of Small Co, aggregate amount of remuneration drawn by Directors is not required to be disclosed in Annual Return; Prescribed private companies granted exemption from internal financial reporting; and For private companies, Interested Directors may also be counted for Quorum in Board meeting after disclosure of his interest pursuant to Section 184.

10 Our Insight Start-ups, being essential contributors in the eco-system of Indian economy, have been given a defined position in the Companies Act, 2013 for the first time. Ministry of Corporate Affairs grants pleasant showers of exemptions to Start-ups, OPCs and prescribed private companies, which pertain to cash flow statements, number of board meetings, remuneration disclosure, quorum of interested directors, to name a few. Ministry provides in this notification that only the compliant companies (those filing financial statements and Annual Returns) enjoy relaxations, not otherwise. Hence, the good boy earns the pastry! The notification has come later than sooner but move is certainly something that would be applauded by industry, corporates as well as professionals like company secretaries, auditors and legal professionals.

11 Landline: (022) Mobile: (+91) Let s Take It Forward. Corporate Office : Mumbai , Keshava Premises, Nr. Family Court, Bandra-Kurla Complex Bandra (East), Mumbai Other Branch Offices at: Ahmedabad I Jaipur I Jodhpur I Nagpur Surat Progress with Values Website: mahavir.lunawat@pantomathgroup.com kanjin.sheth@pantomathgroup.com Online Initiatives: Disclaimer All data and information is provided for informational purposes only and is not intended for any factual use. It should not be considered as binding / statutory provisions. Neither Pantomath Capital Advisors nor any of its group company, directors, or employs shall be liable for any of the data or content provided for any actions taken in reliance thereon.

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