Applicability of the Companies Act, 2013 on Private Companies

Applicability of the Companies Act, 2013 on Private Companies. The Companies Act, 2013, a basis of corporate governance in India, significantly impacts the functioning and compliance obligations of private companies. While offering certain exemptions and relaxations compared to public companies, private entities are by no means immune to its provisions. This Article delves into the applicability of the Act, examining key sections, rules, and compliance requirements pertinent to private companies, with a focus on exemptions and privileges granted to private companies.
Companies Act, 2013 - Applicability and Definition
Section 2(68) of the Companies Act, 2013, defines a "private company" as a company having a minimum paid-up share capital as may be prescribed, and which by its articles:  
(a) Restricts the right to transfer its shares;  
(b) Limits the number of its members to two hundred, excluding employees who are members and former employees who were members while in employment and continue to be members after the employment ceased; and  
(c) Prohibits any invitation to the public to subscribe for any securities of the company.  
This definition forms the bedrock of determining the applicability of the Act. While private companies enjoy certain privileges, they remain subject to the overarching framework of the legislation.
Provisions and Compliance Obligations under the Companies Act, 2013
1. Incorporation and Commencement of Business:
(a) Private companies are required to comply with the provisions of Part I of Chapter II of the Act relating to incorporation.
(b) Section 11, which previously mandated a commencement of business certificate, has been omitted. However, private companies must ensure compliance with all pre-incorporation and incorporation formalities.
(c) The Memorandum of Association (“MoA”) and Articles of Association (“AoA”) must be meticulously drafted, adhering to the prescribed forms and content.  
2. Share Capital and Debentures:
(a) Chapter IV of the Act, dealing with share capital and debentures, applies to private companies, subject to certain exemptions.
(b) Sections relating to the issue of shares, rights shares, bonus shares, and variation of shareholders' rights are generally applicable.
(c) Private companies are prohibited from making public offers of securities, as mandated by the definition in Section 2(68).  
(d) Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, provides for private placement, and the terms and conditions of such placements must be strictly adhered to.
3. Management and Administration:
(a) Chapter VII, concerning management and administration, applies to private companies, with certain relaxations.
(b) Sections relating to the maintenance of registers and records, filing of annual returns, and conduct of meetings are applicable.  
(c) Section 96, dealing with Annual General Meetings (“AGMs”), is applicable, though private companies enjoy certain flexibilities regarding the timing and conduct of AGMs.  
(d) The Companies (Management and Administration) Rules, 2014, provide detailed procedures for these aspects.
(e) Section 173 regarding board meetings is also applicable, though the quorum requirements can be adjusted within certain limits.
4. Directors and Key Managerial Personnel:
(a) Chapter XI, concerning the appointment and qualifications of directors, applies to private companies.
(b) Sections relating to the appointment, disqualification, and removal of directors are applicable.  
(c) Private companies must ensure compliance with the requirements relating to the disclosure of directors' interests under Section 184.  
(d) The applicability of Key Managerial Personnel (“KMP”) requirements depends on the company's paid-up share capital and turnover.  
(e) Section 149 regarding board composition applies, with exemptions for certain private companies.  
5. Accounts and Audit:
(a) Chapter IX, concerning accounts of companies, and Chapter X, concerning audit and auditors, apply to private companies.
(b) Private companies must maintain proper books of accounts and prepare financial statements in accordance with the prescribed accounting standards.  
(c) The appointment of auditors and the conduct of audits are mandatory.  
(d) Sections relating to the reporting of frauds by auditors are applicable.
(e) The Companies (Accounts) Rules, 2014, and the Companies (Audit and Auditors) Rules, 2014, provide detailed guidance.
6. Related Party Transactions:
(a) Section 188, concerning related party transactions, applies to private companies.  
(b) Transactions with related parties must be conducted at arm's length and with the approval of the board of directors.  
(c) The Companies (Meetings of Board and its Powers) Rules, 2014, provide detailed procedures for related party transactions.  
7. Loans, Investments, and Contracts:
(a) Chapter XII, concerning loans and investments by companies, applies to private companies. However there are many exemptions for private companies.
(b) Sections concerning loans to directors and related parties are applicable, with specific provisions and restrictions.
(c) The Companies (Meetings of Board and its Powers) Rules, 2014, provide guidance on these transactions.
Exemptions and Relaxations under the Companies Act 2013 for Private Companies
Private companies enjoy certain exemptions and relaxations under the Act and its rules. These exemptions primarily relate to procedural requirements, disclosure obligations, and certain compliance mandates. The Ministry of Corporate Affairs (MCA) has issued notifications granting exemptions to private companies, particularly small private companies. It's crucial to stay updated on these notifications. Following are the exemptions and privileges granted to private companies.
Minimum Number of Members and Directors
1. Section 3(1)(a): A private company requires only two members and two directors, whereas public companies need seven members and three directors. This simplifies the formation process for private companies.
2. Section 149(1): Private companies can have just two directors, with a more relaxed residency requirement for at least one director, compared to public companies.
Restriction on Invitation to the Public
1. Sections 42 & 67: Private companies cannot offer shares or debentures to the public, exempting them from extensive disclosure and regulatory requirements that public companies must adhere to.
2. Section 62: Private companies are not required to issue a prospectus or red herring prospectus, simplifying capital raising through private placements.
Statutory Audit Requirements
Section 139(1): Private companies must audit their financial statements annually. However, smaller entities (e.g., One Person Companies) may be exempt from the detailed audit requirements that public companies face.
Reporting and Filing Obligations

Section 92: Private companies file less detailed annual returns than public companies, avoiding in-depth disclosures of directors and shareholders.

Section 137(1): They are also not required to disclose corporate governance practices, unlike public companies.

Annual General Meeting (AGM)
Section 96(1): Private companies are not mandated to hold an AGM (Annual General Meeting) if all members consent in writing, offering more flexibility in governance.
Provisions Relating to Shareholding and Transfer of Shares
(a) Section 56: Private companies can restrict the transferability of shares through their articles of association, unlike public companies, which are subject to Stock Exchange regulations.
(b) Section 44: Private companies can place restrictions on share transfer, maintaining control over ownership and preventing unwanted changes.
Provisions Related to Debentures
Section 71: Private companies have more flexibility in issuing debentures, as they are not required to follow the same detailed procedures for debenture trustees or public issues that apply to public companies.
Exemption from Certain Provisions
Section 462: The Ministry of Corporate Affairs (MCA) can exempt private companies from certain provisions, such as the appointment of independent directors, audit committees, and disclosure requirements, through notifications.
Financial Disclosure Relaxations
(a) Rule 3 of Companies (Accounting Standards) Rules, 2006: Private companies face fewer financial disclosure obligations than public companies. For example, they are not required to follow IFRS.
(b) Section 137(1): Private companies are not obligated to submit audited financial reports to the Stock Exchange, unlike public companies.
Loans and Investments
Section 185: Private companies are not bound by the restrictions on granting loans or making investments to directors or related parties, unlike public companies, offering greater flexibility in managing finances.
Share Capital Requirements
Section 2(68): Private companies do not need to meet the minimum share capital requirements imposed on public companies, making it easier for entrepreneurs to start and manage businesses with lower capital.
Conclusion
Private companies, while distinct from public companies, operate within the purview of the Companies Act, 2013. Adherence to its provisions is essential for ensuring legal compliance and maintaining sound corporate governance. While certain relaxations are granted, private entities must remain vigilant in recognizing and fulfilling their obligations. Maintaining accurate records, conducting timely filings, and upholding ethical practices are fundamental requirements. Continuous monitoring of amendments and notifications issued by the MCA is crucial for navigating the evolving regulatory landscape.
If you need any support in Company Incorporation and Compliances you can connect with Compliance Calendar experts through mail info@ccoffice.in or Call/Whatsapp at +91 9988424211.
Frequently Asked Questions (FAQs)
Q1. What is the definition of a "private company" under the Companies Act, 2013, and how does it affect the applicability of the Act?
Answer: A private company, as defined in Section 2(68) of the Companies Act, 2013, is a company that restricts share transfer, limits members to 200 (excluding certain employees), and prohibits public subscription of securities. This definition fundamentally determines the Act's applicability, granting certain exemptions while still requiring adherence to core provisions.
Q2. Are private companies completely exempt from the Companies Act, 2013?
Answer: No, private companies are not completely exempt. While they receive certain exemptions and relaxations, they must comply with the overarching framework of the Companies Act, 2013. This includes regulations regarding incorporation, share capital, management, accounts, audits, and related party transactions, albeit with some tailored provisions.
Q3. What are the key compliance obligations for private companies regarding incorporation and commencement of business?
Answer: Private companies must comply with Part I of Chapter II of the Act for incorporation. Although the requirement for a commencement of business certificate (Section 11) is removed, they must adhere to all pre-incorporation and incorporation formalities. The Memorandum of Association (MoA) and Articles of Association (AoA) must be accurately drafted and filed.
Q4. How does the Companies Act, 2013, regulate the share capital and debentures of private companies?
Answer: Chapter IV of the Act applies to private companies with some exemptions. They must comply with regulations on share issuance, rights shares, bonus shares, and shareholder rights. Importantly, they are prohibited from making public offers of securities, but can conduct private placements under specific rules.
Q5. What are some of the exemptions and relaxations that private companies enjoy under the Companies Act, 2013?
Answer: Private companies benefit from certain exemptions, particularly in procedural requirements, disclosure obligations, and some compliance mandates. These include relaxations in related party transactions, board meeting requirements, and other areas. It's crucial for private companies to stay updated on notifications from the Ministry of Corporate Affairs (MCA) that grant specific exemptions.

The Companies Act, 2013, a basis of corporate governance in India, significantly impacts the functioning and compliance obligations of private companies. While offering certain exemptions and relaxations compared to public companies, private entities are by no means immune to its provisions. This Article delves into the applicability of the Act, examining key sections, rules, and compliance requirements pertinent to private companies, with a focus on exemptions and privileges granted to private companies.

Companies Act, 2013 - Applicability and Definition

Section 2(68) of the Companies Act, 2013, defines a "private company" as a company having a minimum paid-up share capital as may be prescribed, and which by its articles:

(a) Restricts the right to transfer its shares;

(b) Limits the number of its members to two hundred, excluding employees who are members and former employees who were members while in employment and continue to be members after the employment ceased; and

This definition forms the bedrock of determining the applicability of the Act. While private companies enjoy certain privileges, they remain subject to the overarching framework of the legislation.

Provisions and Compliance Obligations under the Companies Act, 2013

1. Incorporation and Commencement of Business:

(a) Private companies are required to comply with the provisions of Part I of Chapter II of the Act relating to incorporation.

(b) Section 11, which previously mandated a commencement of business certificate, has been omitted. However, private companies must ensure compliance with all pre-incorporation and incorporation formalities.

(c) The Memorandum of Association (“MoA”) and Articles of Association (“AoA”) must be meticulously drafted, adhering to the prescribed forms and content.

2. Share Capital and Debentures:

(a) Chapter IV of the Act, dealing with share capital and debentures, applies to private companies, subject to certain exemptions.

(b) Sections relating to the issue of shares, rights shares, bonus shares, and variation of shareholders' rights are generally applicable.

(c) Private companies are prohibited from making public offers of securities, as mandated by the definition in Section 2(68).

(d) Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, provides for private placement, and the terms and conditions of such placements must be strictly adhered to.

3. Management and Administration:

(a) Chapter VII, concerning management and administration, applies to private companies, with certain relaxations.

(b) Sections relating to the maintenance of registers and records, filing of annual returns, and conduct of meetings are applicable.

(c) Section 96, dealing with Annual General Meetings (“AGMs”), is applicable, though private companies enjoy certain flexibilities regarding the timing and conduct of AGMs.

(d) The Companies (Management and Administration) Rules, 2014, provide detailed procedures for these aspects.

(e) Section 173 regarding board meetings is also applicable, though the quorum requirements can be adjusted within certain limits.

4. Directors and Key Managerial Personnel:

(a) Chapter XI, concerning the appointment and qualifications of directors, applies to private companies.

(b) Sections relating to the appointment, disqualification, and removal of directors are applicable.

(c) Private companies must ensure compliance with the requirements relating to the disclosure of directors' interests under Section 184.

(d) The applicability of Key Managerial Personnel (“KMP”) requirements depends on the company's paid-up share capital and turnover.

(e) Section 149 regarding board composition applies, with exemptions for certain private companies.

5. Accounts and Audit:

(a) Chapter IX, concerning accounts of companies, and Chapter X, concerning audit and auditors, apply to private companies.

(b) Private companies must maintain proper books of accounts and prepare financial statements in accordance with the prescribed accounting standards.

(d) Sections relating to the reporting of frauds by auditors are applicable.

(e) The Companies (Accounts) Rules, 2014, and the Companies (Audit and Auditors) Rules, 2014, provide detailed guidance.

6. Related Party Transactions:

(a) Section 188, concerning related party transactions, applies to private companies.

(b) Transactions with related parties must be conducted at arm's length and with the approval of the board of directors.

(c) The Companies (Meetings of Board and its Powers) Rules, 2014, provide detailed procedures for related party transactions.

7. Loans, Investments, and Contracts:

(a) Chapter XII, concerning loans and investments by companies, applies to private companies. However there are many exemptions for private companies.

(b) Sections concerning loans to directors and related parties are applicable, with specific provisions and restrictions.

Exemptions and Relaxations under the Companies Act 2013 for Private Companies

Private companies enjoy certain exemptions and relaxations under the Act and its rules. These exemptions primarily relate to procedural requirements, disclosure obligations, and certain compliance mandates. The Ministry of Corporate Affairs (MCA) has issued notifications granting exemptions to private companies, particularly small private companies. It's crucial to stay updated on these notifications. Following are the exemptions and privileges granted to private companies.

Minimum Number of Members and Directors

1. Section 3(1)(a): A private company requires only two members and two directors, whereas public companies need seven members and three directors. This simplifies the formation process for private companies.

2. Section 149(1): Private companies can have just two directors, with a more relaxed residency requirement for at least one director, compared to public companies.

Restriction on Invitation to the Public

1. Sections 42 & 67: Private companies cannot offer shares or debentures to the public, exempting them from extensive disclosure and regulatory requirements that public companies must adhere to.

2. Section 62: Private companies are not required to issue a prospectus or red herring prospectus, simplifying capital raising through private placements.

Statutory Audit Requirements

Section 139(1): Private companies must audit their financial statements annually. However, smaller entities (e.g., One Person Companies) may be exempt from the detailed audit requirements that public companies face.

Reporting and Filing Obligations

Section 92: Private companies file less detailed annual returns than public companies, avoiding in-depth disclosures of directors and shareholders.
Section 137(1): They are also not required to disclose corporate governance practices, unlike public companies.

Annual General Meeting (AGM)

Section 96(1): Private companies are not mandated to hold an AGM (Annual General Meeting) if all members consent in writing, offering more flexibility in governance.

Provisions Relating to Shareholding and Transfer of Shares

(a) Section 56: Private companies can restrict the transferability of shares through their articles of association, unlike public companies, which are subject to Stock Exchange regulations.

(b) Section 44: Private companies can place restrictions on share transfer, maintaining control over ownership and preventing unwanted changes.

Provisions Related to Debentures

Section 71: Private companies have more flexibility in issuing debentures, as they are not required to follow the same detailed procedures for debenture trustees or public issues that apply to public companies.

Exemption from Certain Provisions

Section 462: The Ministry of Corporate Affairs (MCA) can exempt private companies from certain provisions, such as the appointment of independent directors, audit committees, and disclosure requirements, through notifications.

Financial Disclosure Relaxations

(a) Rule 3 of Companies (Accounting Standards) Rules, 2006: Private companies face fewer financial disclosure obligations than public companies. For example, they are not required to follow IFRS.

(b) Section 137(1): Private companies are not obligated to submit audited financial reports to the Stock Exchange, unlike public companies.

Loans and Investments

Section 185: Private companies are not bound by the restrictions on granting loans or making investments to directors or related parties, unlike public companies, offering greater flexibility in managing finances.

Share Capital Requirements

Section 2(68): Private companies do not need to meet the minimum share capital requirements imposed on public companies, making it easier for entrepreneurs to start and manage businesses with lower capital.

Conclusion

Private companies, while distinct from public companies, operate within the purview of the Companies Act, 2013. Adherence to its provisions is essential for ensuring legal compliance and maintaining sound corporate governance. While certain relaxations are granted, private entities must remain vigilant in recognizing and fulfilling their obligations. Maintaining accurate records, conducting timely filings, and upholding ethical practices are fundamental requirements. Continuous monitoring of amendments and notifications issued by the MCA is crucial for navigating the evolving regulatory landscape.

If you need any support in Company Incorporation and Compliances you can connect with Compliance Calendar experts through mail info@ccoffice.in or Call/Whatsapp at +91 9988424211.

Frequently Asked Questions (FAQs)

Q1. What is the definition of a "private company" under the Companies Act, 2013, and how does it affect the applicability of the Act?

Answer: A private company, as defined in Section 2(68) of the Companies Act, 2013, is a company that restricts share transfer, limits members to 200 (excluding certain employees), and prohibits public subscription of securities. This definition fundamentally determines the Act's applicability, granting certain exemptions while still requiring adherence to core provisions.

Q2. Are private companies completely exempt from the Companies Act, 2013?

Answer: No, private companies are not completely exempt. While they receive certain exemptions and relaxations, they must comply with the overarching framework of the Companies Act, 2013. This includes regulations regarding incorporation, share capital, management, accounts, audits, and related party transactions, albeit with some tailored provisions.

Q3. What are the key compliance obligations for private companies regarding incorporation and commencement of business?

Answer: Private companies must comply with Part I of Chapter II of the Act for incorporation. Although the requirement for a commencement of business certificate (Section 11) is removed, they must adhere to all pre-incorporation and incorporation formalities. The Memorandum of Association (MoA) and Articles of Association (AoA) must be accurately drafted and filed.

Q4. How does the Companies Act, 2013, regulate the share capital and debentures of private companies?

Answer: Chapter IV of the Act applies to private companies with some exemptions. They must comply with regulations on share issuance, rights shares, bonus shares, and shareholder rights. Importantly, they are prohibited from making public offers of securities, but can conduct private placements under specific rules.

Q5. What are some of the exemptions and relaxations that private companies enjoy under the Companies Act, 2013?

Answer: Private companies benefit from certain exemptions, particularly in procedural requirements, disclosure obligations, and some compliance mandates. These include relaxations in related party transactions, board meeting requirements, and other areas. It's crucial for private companies to stay updated on notifications from the Ministry of Corporate Affairs (MCA) that grant specific exemptions.