For private companies, it’s been a testing 15 months for doing business in India. Thankfully, the recent release of the much-awaited notification exempting these companies from myriad compliances of the Companies Act, 2013, will ease their burden of compliance. It lacks reason to treat private companies at par with public companies and in some cases even with listed companies in spite of the fact that generally these companies are smaller in size, mostly family-owned and do not take public money.
Although the exemptions will provide some relief, these exemptions could have been a lot more. Important exemptions regarding the complex private placement process, consolidation of accounts of subsidiaries, detailed disclosures in directors’ report, auditor rotation, and clarity on non-applicability of sections relating to forward-dealing and insider-trading were missing in the notification.
It is pertinent to question as to what is the need to have the private placement process for private companies? The shares are not issued to public. The promoter or investor who subscribes to shares either knows about the company or does its own due diligence and agrees to certain valuation of shares. What purpose will it serve to regulate the pricing through a registered valuer in private transactions like these?
Further, private companies should have been exempted from the requirement of consolidation of accounts of their subsidiaries, particularly when the definition of subsidiary is very wide to include even associate companies and joint venture companies.
Although a detailed directors’ report is extremely critical in case the company has public shareholders who would like to know about the affairs of the company through the directors’ report, but in a private company what purpose will it serve to have such a detailed report? The shareholders in a private company are already aware of the affairs of the company; a minimal disclosure to them should be sufficient.
The concept of rotation of auditors is new in India and was particularly introduced to prevent development of cosy relationship between the auditor and the company and its management, and to review the work of the earlier auditor, which could result in improving the quality of audit. Undoubtedly, rotation has its merits but the question is, will it really benefit closely-held private companies which do not access public funds?
Although these questions remained unanswered, but for now it is good that private companies are at least spared from some stringent regulatory interference. Compliances with difficult provisions of related-party transactions, restrictions on the kinds and manner of issue of capital instruments for fund raising, bar on loans being granted by companies to directors and persons connected to them, and prohibiting interested directors to vote were concerning private companies in their business operations, which this notification exempts.
However, even with these exemptions, there is nothing new that has happened. The Companies Act, 1956, had all these exemptions, which strangely the new Act withdrew. So what this exemption notification does is to just restore the earlier position. That doesn’t solve the problem completely. The clamour of private companies seeking more exemptions should not be left unheard. The government may claim that enough has been done for the ease of doing business through these exemptions coupled with the recent amendments to the Companies Act, 2013. But the reality is far from this claim. If one looks at the amendments to the Companies Act, 2013, the important aspects cover passing related-party transactions by ordinary resolution instead of special resolution and reporting of ‘material’ fraud by the auditors to the government as against reporting of all frauds.
Other aspects are disclosure of fraud in the directors’ report, restricting public access of important board resolutions filed with the registrar of companies, leaving at company’s choice whether or not to have a common seal, exempting minimum capital requirement for incorporation of companies, limiting powers of special courts to try offences, writing off all past losses before declaring any dividend, exempting loans/guarantees/security by holding company to its subsidiaries and providing punishment for accepting deposits in violation of the Companies Act. It is evident from this that other than for related-party transactions and reporting of fraud, the amendments cannot be said to ease business in a real way. A private company must be more than willing to put common seal on its documents or for that matter to have a minimum capital of Rs 1 lakh if these can be exchanged for other significant exemptions which can really mean ease of doing business for them.
Private companies, which neither raise public money nor borrowings and manage their business from privately-arranged capital, should be left to decide their affairs as long as they manage their business affairs lawfully. And that should be the limited check on them.
The author is a partner with J Sagar Associates. Views are personal
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