Special privileges of a Private Company
Unlike a private a public company is subject to a number of regulations and restrictions as per the requirements of Companies Act, 1956. It is done to safeguard the interests of investors/shareholders of the public company. These privileges can be studied as follows :
a) Special privileges of all companies. The following privileges are available to every private company, including a private company which is subsidiary of a public company or deemed to be a public company :
- A private company may be formed with only two persons as member. [Sec.12(1)]
- It may commence allotment of shares even before the minimum subscription is subscribed for or paid (Sec. 69).
- It is not required to either issue a prospectus to the public of file statement in lieu of a prospectus. (Sec 70 (3)]
- Restrictions imposed on public companies regarding further issue of capital do not apply on private companies. [Sec 81 (3)]
- Provisions of Sections 114 and 115 relating to share warrants shall not apply to it. (Sec. 14)
- It need not keep an index of members. (Sec. 115)
- It can commence its business after obtaining a certificate of incorporation. A certificate of commencement of business is not required. [Sec. 149 (7)]
- It need not hold statutory meeting or file a statutory report [Sec. 165 (10)]
- Unless the articles provide for a larger number, only two persons personally present shall form the quorum in case of a private company, while at least five member personally present form the quorum in case of a public company (Sec. 174).
- A director is not required to file consent to act as such with the Registrar. Similarly, the provisions of the Act regarding undertaking to take up qualification shares and pay for them are not applicable to directors of a private companies [Sec. 266 (5) (b)]
- Provisions in Section 284 regarding removal of directors by the company in general meeting shall not apply to a life director appointed by a private company on or before 1st April 1952 [Sec. 284 (1)]
- In case of a private company, poll can be demanded by one member if not more than seven members are present, and by two member if not more than seven member are present. In case of a public company, poll can be demanded by persons having not less than one-tenth of the total voting power in respect of the resolution or holding shares on which an aggregate sum of not less than fifty thousand rupees has been paid-up (Sec. 179).
- It need not have more than two directors, while a public company must have at least three directors (Sec. 252)
b) Privileges available to an independent private company (i.e. one which is not a subsidiary of a public company)
An independent private company is one which is not a subsidiary of a public company. The following special privileges and exemptions are available to an independent private company.
1. It may give financial assistance for purchase of or subscription for shares in the company itself.
2. It need not, like a public company, offer rights shares to the equity shareholders of the company.
3. The provisions of Sec. 85 to 90 as to kinds of share capital, new issues of share capital, voting, issue of shares with disproportionate rights, and termination of disproportionately excessive rights, do not apply to an independent private company.
4. A transfer or transferee of shares in an independent private company has no right of appeal to the Central Government against refusal by the company to register a transfer of its shares.
5. Sections 171 to 186 relating to general meeting are not applicable to an independent private company if it makes its own provisions by the Articles. Some provisions of these Sections are, however made expressly applicable.
6. Many provisions relating to directors of a public company are not applicable to an independent private company, e.g.
- it need not have more than 2 directors.
- The provisions relating to the appointment, retirement, reappointment, etc. of directors who are to retire by rotation and the procedure relating, there to are not applicable to it.
- The provisions requiring the giving of 14 days’ notice by new candidates seeking election as directors, as also provisions requiring the Central Government’s sanction for increasing the number of directors by amending the Articles or otherwise beyond the maximum fixed in the Articles, are not applicable to it.
- The provisions relating to the manner of filing up casual vacancies among directors and the duration of the period of office of directors and the requirements that the appointment of directors should be voted on individually and that the consent of each candidate for directorship should be filed with the Registrar, do not apply to it.
- The provisions requiring the holding of a share qualification by directors and fixing the time within which such qualification is to be acquired and filing with the Registrar of a declaration of share qualification by each director are also not applicable to it.
- It may, by its Articles, Provide special disqualifications for appointment of directors.
- It may provide special grounds for vacation of office of a director
- Sec. 295 prohibiting loans to directors does not apply to it.
- An interested director may participate or vote in Board’s proceedings relating to his concern of interest in any contract of arrangement
7. The restrictions as to the number of companies of which a person may be appointed managing director and the prohibition of such appointment for more than 5 years at a time, do not apply to it
8. The provisions prohibiting the subscribing for, or purchasing of, shares or debentures of other companies in the same group do not apply to it.
9. The provisions of Section 409 conferring power on the Central Government to present change in the Board of directors of a company where in the opinion of the Central Government such change will be prejudicial to the interest of the company, do not apply to it.
When a Private company becomes a Public company
A private company shall become a public company in following cases :
i) By default : When it fails to comply with the essential requirements of a private company provided under Section 3 (1) (iii) Default in complying with the said three provisions shall disentitle a private company to enjoy certain privileges (Sec. 43).
ii) A private company which is a subsidiary of another public company shall be deemed to be a public company.
iii) By provisions of law - Section 43-A.
- Where not less than 25% of the paid-up share capital of a private company is held by one or more bodies” corporate such a private company shall become a public company from the data in which such 25% is held by body corporate [Sec. 43-A (1)]
- Where the average annual turnover of a private company is not less than Rs. 10 crores during the relevant period, such a private company shall become a public company after the expiry of the period of three months from the last day of the relevant period when the accounts show the said average annual turnover [Sec. 43 A (1 A)].
- When a private company holds not less than 25% of the paid up share capital of a public company the private company shall become a public company from the date on which the private company holds such 25% [Sec. 43A (IB)].
- Where a private company accepts, after an invitation is made by an advertisement of receiving deposits from the public other than its members, directors or their relatives, such private company shall become a public company [Sec. 43A (IC)].
iv) By Conversion : When the private company converts itself into a public company by altering its Articles in such a manner that they no longer include essential requirements of a private company under Section 3 (1) (iii). On the data of such alternations, it shall cease to be private company. It shall comply with the procedure of converting itself into a public company [Sec. 44].
The Articles of Association of such a public company may continue to have the three restrictions and may continue to have two directors and less than seven members.Within 3 months of such a conversion. Registrar of Companies shall be intimated. The Registrar shall delete the word ‘Private’ before the words ‘Limited’ in the name of the company and shall also make necessary alternations in the certificate of incorporation.
III. On the basis of Control
On the basis of control, a company may be classified into :
- Holding companies, and
- Subsidiary Company
1. Holding Company [Sec. 4(4)]. A company is known as the holding company of another company if it has control over the other company. According to Sec 4(4) a company is deemed to be the holding company of another if, but only if that other is its subsidiary.
A company may become a holding company of another company in either of the following three ways :-
- by holding more than fifty per cent of the normal value of issued equity capital of the company; or
- By holding more than fifty per cent of its voting rights; or
- by securing to itself the right to appoint, the majority of the directors of the other company , directly or indirectly.
The other company in such a case is known as a “Subsidiary company”. Though the two companies remain separate legal entities, yet the affairs of both the companies are managed and controlled by the holding company. A holding company may have any number of subsidiaries. The annual accounts of the holding company are required to disclose full information about the subsidiaries.
2. Subsidiary Company. [Sec. 4 (I)]. A company is know as a subsidiary of another company when its control is exercised by the latter (called holding company) over the former called a subsidiary company. Where a company (company S) is subsidiary of another company (say Company H), the former (Company S) becomes the subsidiary of the controlling company (company H).
IV. On the basis of Ownership of companies
- Government Companies. A Company of which not less than 51% of the paid up capital is held by the Central Government of by State Government or Government singly or jointly is known as a Government Company. It includes a company subsidiary to a government company. The share capital of a government company may be wholly or partly owned by the government, but it would not make it the agent of the government . The auditors of the government company are appointed by the government on the advice of the Comptroller and Auditor General of India. The Annual Report along with the auditor’s report are placed before both the House of the parliament. Some of the examples of government companies are - Mahanagar Telephone Corporation Ltd., National Thermal Power Corporation Ltd., State Trading Corporation Ltd. Hydroelectric Power Corporation Ltd. Bharat Heavy Electricals Ltd. Hindustan Machine Tools Ltd. etc.
- Non-Government Companies. All other companies, except the Government Companies, are called non-government companies. They do not satisfy the characteristics of a government company as given above.
V. On the basis of Nationality of the Company
- Indian Companies : These companies are registered in India under the Companies Act. 1956 and have their registered office in India. Nationality of the members in their case is immaterial.
- Foreign Companies : It means any company incorporated outside India which has an established place of business in India [Sec. 591 (I)]. A company has an established place of business in India if it has a specified place at which it carries on business such as an office, store house or other premises with some visible indication premises. Section 592 to 602 of Companies Act, 1956 contain provisions applicable to foreign companies functioning in India.
Company may be defined as group of persons associated together to achieve some common objective. A company formed and registered under the Companies Act has certain special features, which reveal the nature of a company. These characteristics are also called he advantages of a company because as compared with other business organizations, these are in fact, beneficial for a company. Companies can be classified into five categories according to the mode of incorporation on the basis of number of members, on the basis of control, on the basis of ownership and on the basis of nationality of the company.
Company: A company means a body of individuals associated together for a common objective, which may be business for profit or for some charitable purposes.
Registered Company: A registered company is one which is formed and registered under the Indian Companies Act, 1956 or under any earlier Companies Act in force in India.
Public Company: A public company means a company which is not a private company. Any seven or more persons can join hands to form a public company.
Holding Company: A company shall be deemed to be the holding company to another if that other is its subsidiary.
Unlimited Company: A company not having any limit on the liability of its member is called an unlimited company.