Private, but not really cosy 

Private companies have to brace themselves for a stricter regulatory regime under the new Companies Bill. Although there are some positives for such companies, they clearly face more stringent regulations. This is because many of the exemptions currently available to them will stand withdrawn in the new regime.

Positives

Among the positives is the proposal to enhance the maximum membership from 50 to 200. Also, a subsidiary of a public company can now retain certain features of a private company even while being considered public for most provisions of the company law. The restrictive clauses that could be retained in the article of association include the one on share transfer.

issue of shares

If a public company intends to increase its capital any time after two years from its formation, or one year from the first allotment of shares, whichever is earlier, the Companies Act mandates offering new shares to existing equity shareholders in proportion to their shareholding. Exceptions are permissible only through approval of a general meeting by way of a special resolution or ordinary resolution, followed by the approval of the central government. Private companies are currently exempted from this requirement. Withdrawal of this exemption means that private limited companies would also have to undergo the same procedural compliances as public companies.

financial statements

The Companies Act, 1956 allows a private limited company to file its balance sheet, and profit and loss account separately with the Registrar of Companies. The profit and loss account of a private limited company is not open to inspection by the general public. The Companies Bill gives no such privilege to private companies.

loans and investments

Under Companies Act, a public company intending to invest in securities of, or extend loans to other body corporates may do so with requisite shareholder approval if the quantum of investment or loan exceeds the prescribed limit. In the case of inter-corporate loans, rate of interest cannot be lower than the prescribed rate.

Two changes proposed in the Bill could have a significant impact on private companies — blanket exemptions for private companies have been withdrawn; and, more importantly, exemption for loans and investments made by the holding company to its wholly-owned subsidiary have been done away with. Thus, interest-free loans from a holding company to its wholly-owned subsidiary, irrespective of whether it is private or public, would no longer be possible. Private companies dependent on fund infusion from their holding companies would have to closely relook their business plans and explore other options of fund raising.

Consolidation of accounts is mandatory only for listed companies. However, the Companies Bill makes no distinction between private and others in this regard.

statement for subsidiaries

A private company with a subsidiary would have to prepare a consolidated financial statement of the company and its subsidiaries. Further, a separate statement containing the salient features of the financial statement of the subsidiaries is also required.

‘Subsidiary company’, for the purpose of this compliance, includes associate company and joint venture.

There are various other proposed amendments applicable to private companies, such as obtaining a certificate to commence business, obtaining consent from directors before their appointment, prohibition on interested directors voting on resolutions, obtaining consent from shareholders through special resolution for sale or disposal of a company’s undertaking. Apart from this, guidelines on Corporate Social Responsibility and disclosures in directors’ responsibility statement with regard to existence of systems for compliance with applicable laws, apply to all companies including private limited companies.

The intent of lawmakers seems to be clear — private companies should move to a stricter regime in terms of disclosure and compliance. This would not only require revamping and scaling up internal processes but also making a paradigm shift towards a change in culture and mindset. In the long run, this will boost the standards of corporate governance in India Inc.

Harpreet Singh is Executive Director, and Pankaj Tewari is Senior Manager, Risk Advisory Services, PwC India

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