5 reasons
private limited companies are back in fashion
“Is it better for startups to opt for an LLP instead of a privatelimited Companies?” “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.
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 (Limited LiabilitiesPartnership)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.
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 in India, startups needto file 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 categorizing
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 Company, 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
