Impact of New companies Act on Private limited Companies, 2013

The long-awaited Companies Bill 2013 got its assent in the Lok Sabha on 18 December 2012 and in the Rajya Sabha on 8 August 2013. This was basically an attempt to reduce the substantive portion of the act. The drastic changes in the new Act were that of the rule-making power under the new companies act, 2013 because, at more than 75% of places under the new law, the legislator uses the words as may be prescribed. It means that a substantive portion of the act was prescribed in the rules and rules-making authority lies with the ministry, meaning thereby to amend rules the ministry doesn't need to follow the long process required while amending the Act. So, the new act has given more teeth to the ministry and made this act one of the draconian legislation.

Registrationwala.com is pleased to bring you a new publication in the form of a write-up, Impact of Companies Act, 2013 on private limited companies. This publication brings out the relevant changes proposed by the 2013 Act as compared to the 1956 Act. The 2013 Act come up with significant modifications in the provisions related to governance, e-management, compliance and enforcement, disclosure norms, auditors, and mergers and acquisitions of private limited companies.

Let's understand one by one:

1. Definition of the private limited company: Under the companies act, 1956 (Old act) act the maximum number of members was 50 whereas under the new companies act, 2013 (New act) the maximum number of members has increased to 200.

2. Further issue of shares: Provision related to the right issue and preferential allotment were not applicable to the private companies. But under the new act if the private limited companies further want to issue share or ESOP, or going to make private placement then it has to comply with all the provisions of the private placement as prescribed under section 62 of the new act.

3. Shares with differential voting rights: Again provisions related to differential voting rights shares were not applicable to the private limited companies under the CA, 1956 but the scenario under the new act is quite different. Now even private limited companies also have to follow the provisions of the new act regarding the issue of shares with differential voting rights.

4. Appointment of Key Managerial Personnel (KMP): The term KMP was coined first time in the new act which basically includes Managing director, Whole-time director (WTD), Company Secretary, and Chief Financial Officer (CFO) mainly. In the earlier act, as such, there was no such type of concept, but under the new act if the company goes beyond a certain level in terms of paid-up capital then they have to mandatorily appoint the KMP.

5. Loan to directors: Earlier there were no restrictions to loan to directors in the case of private limited companies but as per the new companies act, 2013, section 185 related to the loan to directors completely prohibits lending money to directors, though last year June 2015, MCA relaxed this provision for private limited companies if certain criteria are met only.

6. Resident Director: Under the old act, there was no requirement to have a resident director while incorporating private limited companies but now under the new act, it is one of the mandatory requirements to have a resident director to register private limited companies in India.

Here, resident means if a person who has stayed in India for a total period of not less than 182 days in the previous year.

7. A number of directorships: It is quite a famous provision when it comes to the basic question regarding the number of companies where a person can hold a directorship because the law can not allow a person to freely hold the directorship as per his own wish from the management point of view. Bar on holding the directorship was also there in the old act but while counting the number of companies where a director holds directorship private limited companies were not taken into account whereas, under the new act, private limited companies are also counted to know the actual number of directorship.

8. The number of audits done by an auditor: The auditor can audit up to a certain number of companies as prescribed by the company law. This bar is usually imposed to maintain the quality of the audit. Under the old act private limited companies' audits were not counted to calculate the limit of the number of audits but under the new act, private limited companies' audits are also included to calculate the total number of audits done by an auditor.

9. Corporate Social responsibility: Till 2013 when the old act was prevalent, CSR was nowhere in the companies act but the companies act, 2013 made a remarkable move by mandating the CSR provision in the new act itself and by virtue of that India has become the first ever country which made it mandatory for certain classes of companies to spend at least 2% of their average net profit which shall be calculated as per new companies act, on certain activities as prescribed under Schedule VII.

10. Consolidation of the accounts: Consolidations basically mean combining the accounts of other companies as well and consolidating all the figures. Basically, consolidation only applies when a company has its subsidiary and associate company. Under the old act, there were no such provisions of consolidation unless the company's shares have not been listed on stock exchanges. But under the new, act all companies even private limited companies are also required to prepare consolidated financial statements if they are having their associate or subsidiary company.

This is not an exhaustive list of comparisons but still, it will guide the compliance officer or the owner or director of the private limited companies to get an idea of how the regulatory system affects the business of the companies. To know more about other regulations and their applicability to private limited companies, write your comment in the box.