5 reasons private limited companies are back in fashion

25th Jun 2015
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“Is it better for startups to opt for an LLP instead of a private limited?” “Doomsday for private limited companies!” “Draconian Companies Act 2013 makes life for private limited companies a bed of thorns!”“Startups…forget about private limited, LLP is the next big thing!”Even a few months back, consultants were advising startups against registering a private limited company. I cannot say I blamed them. There were good reasons.

The Companies Act, 2013, brought in its wake lots of practical dilemmas. The whole point of uprooting the old Companies Act was to prune age-old and, now, irrelevant provisions. This purpose seemed to have miserably failed. However, the present Government has amended the entire Companies Act. Additionally, various new measures have been introduced in order to facilitate doing business in India. By virtue of these initiatives, private limited companies are back in fashion.


Private-limited-companies

1. No minimum capital required to start a private limited company: LLP always had an edge over the private limited companies when it came to this clause. In India, one can start an LLP with Rs 1 as contribution whereas, earlier, for a private limited company a minimum capital of Rs 100, 000 had to be provisioned for.

Impact of this amendment:

There is no minimum capital requirement and hence no burden of putting in such a large amount, as previously required, into the company bank account. This amount can be introduced as per the convenience of the business owners.


2. Introduction of Fast Track Mode of Incorporation:The Ministry of Corporate Affairs (MCA) introduced this new scheme, effective from 1st May, 2015. Now, instead of filing separate e-forms for allotment of Director Identification Number, Name of Company and Incorporation of a company, startups needtofile one single form, INC 29, to incorporate their company.Now startups have two options:

  • The Fast Track Route: Filing of INC 29 with a fee of Rs2,000 in addition to the normal filing fees
  • The Regular Route: with the normal filing fees

Impact of this introduction:

This initiative was brought in to incorporate companies in a couple of days.After incorporating around over 15 startups by this method, we have found that incorporation, in reality, takes around around five days . Nevertheless, this indeed is a huge improvement over the existing timeline of 15 to 20 days.

 

3. Exemption from Filing of INC 21: A newly formed company could not commence operations until it has filed with the RoC a declaration that the paid-up capital has been subscribed by the signatories to the Memorandum. Hence, technically, startups had only one option–deposit the Rs 100,000 as soon as the company gets incorporated.

Impact of this exemption:

This requirement has been done away with. Hence, there is no undue pressure on startups to subscribe to the shares immediatelyon incorporation. Startups, take a deep breath and kick-start your operation.

 

4. Acceptance of Deposits from Members:In India, private limited companies are generally formed as closely held companies. In these types of entities, loans and advances from relatives and members are the most important sources of finance. Companies Act 2013 made it practically impossible for startups to run their businesses by categorising loan from any party apart from directors of the company as “Deposits”. Moreover, the Directors were not allowed to advance such loans from borrowed funds. Companies accepting deposits were required to follow the rigorous provisions as applicable at par with the public limited companies, which included:

  • Issuance of Circular
  • Filing of circular with ROC
  • Maintaining Deposit repayment reserve
  • Provision of deposit insurance

Hence, the companies could take loans either from its directors or from banks. While it practically gets very difficult for directors to dish out personal resources, it also takes a lot of time and troubleto avail loans from banks. After numerous representations from various parties and councils, the Government has come up with a partial exemption.

Impact of this exemption:

Private Companies can now borrow money from members up to aggregate limit of paid-up share capital andfree-reserves. They would not need to comply with “Deposit”conditions. This in turn has again ensured the free flow of hassle-free resources.

 

5. Loans to Director: While private companies were not allowed to borrow money from any one apart from the directors, they were not allowed to advance money to anyone includingits directors. It was further prohibited for these entities to even provide guarantee for the loan that the directors availed intheir personal capacity. These provisions pertaining to loans faced severe criticisms.

 Impact of this exemption:

 A private limited company is now allowed to provide loan orguarantee/security to directors, subject to the following conditions:

  • Such guarantor company should not have a body corporate as a shareholder
  • Such company should not have borrowed money from bank/ financial institution/ body corporate exceeding twice its paid-up capital or Rs 50 crore, whichever is lower.
  • No repayment default is subsisting of such borrowings at time of giving the loans

Few others notable exemptions to private limited companies include:

  • Definition of Related Party relaxed: Holding, Subsidiary, Associate Company and sister concerns out of ambit.
  • Minimum time limit for rights issue relaxed. Minimum offer period can be reduced, if 90% members give their consent in writing or electronic mode.
  • Articles of Association may contain over-riding provisions to Companies Act pertaining to content andlength of notice, explanatory statement, quorum, chairman, proxies, restriction on voting right, show of hands and poll (subject to certain conditions).
  • Interested directors can now participate in board meeting subject to the disclosure of their interest.

In all, the Government has summarised the pain points of the businesses and tried to bring about a restorative mechanism. While we consultants had our fair share of trouble resolving the practical difficulties of companies Act, 2013, the startups suffered the most. While measures like no minimum capital requirement would grease the entry points for starting up, relaxations in deposit norms and provision for loans would lubricate the maintenance of the businesses.

You may get in touch with the author on his website Taxmantra.com and get more information.

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