Private companies may feel the regulatory heat as the new company law has tightened the legislative framework around their functioning. Being private has brought on an added set of compliance requirements and costs for such companies, say legal experts.
This is because the new company law looks to subject private companies to greater control and regulations.
Whether it be borrowing money or sale of any part of the business or any undertaking, private companies will now be required to get shareholders’ approval through a special resolution in a general meeting.
The Corporate Affairs Ministry on Friday notified 98 sections including some that will have a significant impact on the functioning of private companies.
Jury still out
Not all are opposed to more control and regulations on private companies. Some feel this tightening and added regulatory focus has come partly due to private companies’ own making as they used the lax regulatory framework to their advantage.
The jury is still out as to whether new regulatory requirements will stifle formation of private entities.
But many of the hitherto existing benefits for this structure are now gone, say experts.
The real question should be — are these added costs necessary in this difficult economic environment?
“The need of the hour is that a sincere and positive differentiation be made to subserve the cause of small companies.
“This is all the more necessary in view of the ever-increasing cost of doing business and compliance cost,” Aseem Chawla, Partner at law firm MPC Legal, told Business Line.
Private companies will now require shareholders’ approval (through special resolution) for preferential allotment of shares, pointed out Lalit Kumar, Partner at law firm J Sagar Associates.
Hitherto, no shareholders’ approval was required for any preferential allotments.
In the new regime, loans to directors and their affiliated persons and inter-corporate loan, guarantee and investments will be subject to stringent conditions.
Interested directors will not be allowed to vote, Kumar added.
stringent conditions
Private companies can issue only two classes of shares — equity and preference shares.
Also, voting rights will have to be in proportion to shareholding.
Kumar said the added controls and regulations for private companies could still get relaxed if the Government, in the coming days, were to decide to grant specific exemptions for such companies.