Exemptions For Private Limited Companies Under Companies Act, 2013

Introduction

The Companies Act, 2013, provides several privileges and exemptions to private companies (excluding subsidiaries of public companies) to ease their regulatory burden and facilitate business operations. Since private companies cannot invite public investment, their compliance requirements are relaxed compared to public companies. However, these exemptions cease if the company converts into a public entity.

About this Article

This article provides a detailed overview of key exemptions available to private limited companies under the Companies Act, 2013. Many entrepreneurs, compliance professionals, and startup founders struggle with regulatory obligations, and this guide simplifies the understanding of various relaxations provided by law.

The article covers exemptions related to capital requirements, board meetings, auditor appointments, director limits, and secretarial filings, helping companies operate efficiently while staying compliant.

This article is useful for:

✔️ Company Secretaries & Compliance Officers – Understanding exemptions for private companies.

✔️ Entrepreneurs & Startups – Knowing compliance reliefs before incorporating a private company.

✔️ Legal & Finance Professionals – Advising clients on the benefits of a private company structure.

Origin and Need for Exemptions

Historically, private companies have been granted regulatory relaxations due to their limited public accountability. The rationale behind these exemptions includes:

  • Encouraging entrepreneurship and small business growth.
  • Reducing compliance costs for privately held businesses.
  • Allowing operational flexibility in decision-making and structuring.
  • Aligning corporate governance regulations with business scale and complexity.
  • Promoting ease of doing business and attracting investments in the private sector.

The exemptions granted to private companies are embedded in various sections of the Companies Act, 2013, read with the applicable Rules and amendments introduced over time. The Ministry of Corporate Affairs (MCA) periodically reviews and updates these exemptions to align with evolving business needs.

Section 462 and Its Role in Exemptions

Section 462 of the Companies Act, 2013, empowers the Central Government to grant exemptions, modifications, or adaptations to certain provisions of the Act for specific classes of companies, including private companies.

Under this section, several notifications have been issued by the MCA, granting private companies relief from various regulatory burdens.

Notable MCA notifications ( Most notable Notification dated 30 June, 2015 ) under Section 462 include:

  • Exemptions from board resolutions filing requirements (Section 117).
  • Relaxation in related party transaction approvals (Section 188).
  • Exemption from maintaining a separate register of contracts (Section 189).
  • Exemptions from appointing independent directors and other governance-related requirements.
  • Reduction in compliance requirements for private companies with lower financial thresholds.
  • Relaxation in filing of board meetings resolutions and financial reporting.

The Central Government reviews and revises these exemptions periodically, ensuring they remain relevant and beneficial to the private sector.

Meaning of Private Company

As per Section 2(68) of the Companies Act, 2013, “private company” means a company having a minimum paid-

up share capital as may be prescribed, and which by its articles:–

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its members to two hundred: and 

(iii) prohibits any invitation to the public to subscribe for any securities of the company.

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member: 

Provided further that - 

(a) persons who are in the employment of the company; and

(b) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; 

Key Points on Private Limited Companies

  1. Limit on Members: Minimum 2, maximum 200 members as per the Companies Act, 2013. Joint holders count as a single member. Employees (current or former) are not counted if they became members during employment.
  2. Debenture Holders: No limit on the number of debenture holders, but public invitations for subscriptions are prohibited.
  3. Limited Liability: Shareholders’ liability is limited to their shareholding. However, if the number of members falls below 2 for over six months, remaining members become personally liable for company debts (Section 3A).
  4. Perpetual Succession: The company continues to exist despite changes in membership due to death, insolvency, or bankruptcy.
  5. Index of Members: Required unless the number of members is below 50.
  6. Number of Directors: Minimum of 2 directors required.
  7. Paid-Up Capital: No minimum capital requirement.
  8. Prospectus: Private companies cannot invite the public to subscribe for shares, so issuing a prospectus is not required.
  9. Commencement of Business: A company with share capital must:
  • File a declaration within 180 days confirming share subscription.{FORM INC 20A}
  • Verify its registered office with the Registrar.
  1. Name Requirement: “Private Limited” must be included in the company’s name.

Key Privileges and Exemptions

1. Ease of Formation

  • A private company can be incorporated with a minimum of two members and two directors (Section 3).
  • Unlike public companies, no minimum paid-up share capital is required (Section 2(68)).
  • Incorporation can be completed through SPICe+ (Simplified Proforma for Incorporating Company Electronically), streamlining the process.
  • Private companies benefit from reduced documentation and regulatory oversight during incorporation.

2. Small Company Benefits

As per Section 2(85), a private company qualifies as a Small Company if:

Paid-up capital does not exceed ₹4 crore, and

turnover is up to ₹40 crore.

It enjoys lesser compliance requirements, including exemption from mandatory rotation of auditors and fewer ROC filings.

Reduced financial statement disclosure requirements allow small companies to maintain privacy over financial records.

One person companies, small companies, and dormant companies must hold at least one board meeting in each half of the year unlike other Companies which are Required to hold at least 4 Board meetings during the year.

One-person companies (OPCs), small companies, and dormant companies are exempt from preparing cash flow statements

3. Flexibility in Alteration of Articles

  • Private companies can include entrenchment provisions in their Articles of Association (Section 5(3)).
  • Such provisions impose additional conditions for altering key clauses, ensuring better protection for members.
  • This is particularly useful in family-run businesses where ownership control is a priority.

4. Exemptions in Issuance of Shares

  • No requirement to issue a prospectus or file a statement in lieu of a prospectus (Section 26).
  • Exempted from Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014, which mandates dematerialization for unlisted public companies.
  • No requirement for minimum subscription before allotment of shares.
  • Allows private companies to raise capital with minimal regulatory interference.

5. Closure of Register of Members/Debenture Holders

  • Exempted from public notice requirements applicable to listed companies under Section 91 and Rule 10 of the Companies (Management and Administration) Rules, 2014.
  • Private companies can close their register without issuing a public notice, simplifying administrative tasks.

Minimum two directors required (Section 149(1)).

No requirement to retire directors by rotation (Section 152(6)).

Exempted from appointing:

  • Woman Director (Section 149(1)).
  • Independent Directors (Section 149(4)).

Additional disqualification criteria for directors can be specified in Articles of Association (Section 164(3)).

Exemption from Resident Director Requirement: Private companies are not required to ensure that one director resides in India for at least 182 days in a financial year, unlike public companies.

Private companies are not required to follow Section 160, which mandates a person to file a notice before being considered for appointment as a director in a public company.

Loans to Directors Permitted

Section 185 prohibits companies from providing loans to directors. However, private companies can extend loans to directors if:

  • No other corporate entity has invested in the company.
  • The company’s borrowings do not exceed its paid-up capital and reserves.

8. Quorum for Board Meetings (Section 174)

A private company’s board meeting quorum requires only two directors present in person, unless the articles of association specify a higher number. This contrasts with the quorum requirements for public companies, which are typically based on a fraction of the total strength of the board. This exemption acknowledges the often smaller size of private company boards.

8. Key Managerial Personnel (KMP) Requirements

  • Appointment of MD, CEO, CFO, and Whole-time Director is not mandatory (Section 203).
  • However, private companies with paid-up capital of ₹10 crore or more must appoint a Company Secretary.
  • No requirement for separation of roles between Chairperson and CEO.

9. Managerial Remuneration

  • The 11% cap on total managerial remuneration applicable to public companies (Section 197) does not apply.
  • Private companies can determine their own managerial pay structure through their Articles and resolutions.
  • Provides flexibility in structuring executive compensation.

10. Exemptions in General Meetings

  • No requirement to file MGT-15 (Report on Annual General Meeting) (Section 121).
  • Exempted from postal ballot requirements under Section 110.
  • Section 188 restricts related party transactions in public companies, requiring board or shareholder approval for transactions exceeding prescribed limits.
  • Exemption for private companies: If all shareholders consent, related party transactions can be conducted without board or general meeting approval.
  • This allows closely held private companies to enter into intra-group transactions with minimal regulatory hurdles, benefiting family-owned businesses and startups.

12. Exemptions in Accepting Deposits

  • Private companies can accept deposits from members without compliance with deposit rules, subject to conditions under Section 73(2).
  • Section 73(2) imposes strict conditions on deposit acceptance by companies. However, private companies can accept unsecured loans or deposits from directors and their relatives without complying with stringent conditions applicable to public companies.
  • Section 73(2) Shall not apply to a private company which accepts from its members monies not exceeding one hundred percent of aggregate of the paid up share capital and free reserves, and such company shall file the details of monies so accepted to the Registrar. in such manner as may be specified.
  • Exemption from maintaining a Deposit Repayment Reserve Account and obtaining credit ratings.

13. Exemption from Restrictions on Share Transfers

  • Unlike public companies, private companies can impose restrictions on share transfers in their Articles (Section 58).
  • This enables owners to maintain control over shareholding structure.

14. Internal Audit Requirements

Internal audit (Section 138) is required only if:

  • Turnover exceeds ₹200 crore in the previous financial year.
  • Loans/borrowings from banks exceed ₹100 crore.

15. Corporate Social Responsibility (CSR) Committee

CSR applicability under Section 135 is triggered if:

  • Net worth ≥ ₹500 crore, or
  • Turnover ≥ ₹1000 crore, or
  • Net profit ≥ ₹5 crore.

If a private company has only two directors, its CSR committee can have two members instead of three.

16. Exemption from Audit & Nomination Committees

Section 177 and Section 178 mandate the formation of an Audit Committee and Nomination & Remuneration Committee for listed and specified public companies. Private companies are exempt from this requirement, reducing compliance costs.

Additionally, Exemption from Establishment of Vigil Mechanism.

17. Relaxation in Filing Board Resolutions (MGT 14)

Under Section 117(3)(g), resolutions passed at board meetings must be filed with the Registrar of Companies (ROC). However, private companies are exempt from filing board resolutions passed pursuance of sub-section (3) of section 179.

18. Restrictions on Borrowing Powers (Section 180)

  • Section 180, which places restrictions on the borrowing powers of a company’s board, disposal of undertakings, and creation of security or guarantees, applies only to public companies and does not extend to private companies.

  • Public companies require shareholder approval by a special resolution for:

    • Selling, leasing, or disposing of a significant part of the company’s undertaking.
    • Borrowing beyond the company’s paid-up capital and free reserves.
    • To invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation.
    • Providing guarantees or security for third-party loans.

  • Private companies are exempt from these restrictions, allowing them to make borrowing decisions and financial transactions more flexibly.

  • This exemption helps private companies to quickly secure loans, create charges on assets, and undertake financial transactions without the need for shareholder approval.

19. Appointment of MD, WTD, and Manager (Section 196)  

  • Section 196 deals with the appointment of the Managing Director (MD), Whole-Time Director (WTD), and Manager, specifying eligibility, term, and approval requirements.

  • Public companies must adhere to strict conditions:

    • The appointment requires approval at a board meeting followed by a shareholder resolution.
    • The age limit for appointment is between 21 and 70 years, unless special resolution approval is obtained.
    • The tenure is capped at five years, requiring reappointment through a fresh approval process.
    • Additional compliance requirements exist under Schedule V, particularly regarding remuneration and qualifications.

  • Private companies are exempt from these restrictions, allowing them to appoint MDs, WTDs, or Managers without following these formalities.

  • The exemption enables private companies to have flexible leadership structures without regulatory delays or shareholder interventions.

20. No Mandatory Rotation of Auditors:  

As per Section 139(2), the rotation of auditors is mandatory for certain companies. Private companies are exempt from this requirement if their turnover and paid-up share capital remain below the prescribed threshold.

Conclusion

The privileges and exemptions granted to private companies under the Companies Act, 2013, particularly under Section 462, play a vital role in supporting business growth and flexibility. The MCA continues to refine these provisions to adapt to evolving market conditions, ensuring a balance between regulatory compliance and operational efficiency.