WHAT IS PRIVATE LIMITED COMPANY AS PER COMPANIES ACT 2013?

Private Limited Companies, as discussed under the Companies Act 2013, along with its features, types of private companies and types of directors and types of securities, will be dealt with in the article.
Estimated Reading Time: 7 minutes

Introduction

Private Limited Companies are governed by the Companies Act. 2013 under the Ministry of Corporate Affairs. The Companies Act, 2013 was passed by the Parliament in August 2013, and the legislation passed has been amended the law relating to corporate affairs. A private limited company can have a minimum of two members and can go as far as two hundred members have limited liability of its members. Still, it has many similar characteristics to that of a partnership firm.

This article will discuss the Private Limited Company according to the Companies Act, 2013. A private company should have at least have a minimum of two directors and a maximum of fifteen directors. A private limited company lies between a partnership firm and a publicly owned company. The limit of shareholders can go up to two hundred, and it is acceptable in any Private Limited Company. The private limited company under the Companies Act, 2013 has its own merits and demerits based on its field of operations. Towards the end, the article will elaborate on how a private limited company can be incorporated under the Companies Act, 2013.

Meaning and Definitions

As this article focuses upon a Private Limited Company under Companies Act, 2013, let’s first understand the basic meaning of a company.

Company– The term ‘Company’ has been derived from two Latin words, which are “Com” and “Panies”, where the term “Com” means ‘with or together’ and the word “Panies” means ‘bread’. Therefore, if it is read together, the word company means an association of persons who took their meal together.

In standard and business understanding, the term company means an association of people working together to achieve common goals and profit-making. A company is a person that has a separate legal entity and identity.

 A person who contributes his money and efforts to a company is known as a “member” or a “shareholder” of that company.

As per section 2(20) of the Act, ―company means a company incorporated under this Act or under any previous company law;

Companies are of two types- 1- Private Company.

2- Public Company.

PRIVATE COMPANYSection 2(68) of the Companies Act 2013, defines a private company. The Act reads as follows:

“―private company means a company having a minimum paid-up share capital[1] *** 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: 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; and (iii) prohibits any invitation to the public to subscribe for any securities of the company;”

The definition of a private company under the Act clearly states that the maximum number of members that a Private Limited Company can accommodate is two hundred, which was previously fifty. The Act also mentions that the financial year for a company’s balance sheet will be Thirty First of March for all the companies.

According to the section, Private companies are those companies whose article of association is limited along with the transferability of shares and is not open for all. The transfer of shares is restricted and cannot be made available to all, unlike the publicly owned company. Hence, it is one of the major differences between a private limited company and a public limited company.

Private companies can have a minimum paid-up capital of any amount as per an amendment in 2005.[2] Previously, the prescribed minimum limit for paid-up share capital was Rs. 1 Lakh for private companies.

Features of Private Limited Company

  1. No minimum capital required for paid-up share, which was previously limited to Rs. 1Lakh.
  2. Minimum 2 and maximum 200 members. Even one person is enough, and it is a one-person company.
  3. The transferability of shares in a Private Company is restricted, and they cannot freely transfer their shares to the general public like the public companies.
  4. Private companies need to include “Private Limited” or “Pvt. Ltd.” in their names.
  5. Private companies have been given some privileges and exemptions which public companies do not enjoy.

Types of Privates Companies

Private companies are of three types depending on their member’s liabilities.

  1. Limited by Shares- Liability of members is limited to the amount unpaid to the company regarding the number of shares they have.
  2. Limited by Guarantee- Liability of members is limited to the amount of money they guarantee to pay if the company decides to wind-up.
  3. Unlimited Liability- Personal assets are also sometimes attached to the company of the members, and it becomes an unlimited liability.
  4. One Member Company- According to the Act of 2013, there can be a one-member private company known as One Person Company.
  5. Limited Paid-up share- According to section 2(85) of the Companies Act, any company with limited paid-up share capital, and turnover amounts will also be considered private companies under Indian Company Law.

Privileges of Private Limited Companies

Private Limited Companies have certain privileges and exemptions which the Public Company does not possess. The privileges provide private companies with a more significant amount of freedom for their affairs.

  1. No report required to be made for general meetings.
  2. The minimum number of directors required is only 2.
  3. There is no need to appoint independent directors.
  4. Additional grounds can be adopted or raised for vacating or disqualifying a director.
  5. The remuneration paid to directors in a private company is higher than any other companies.

Exemptions of Private Limited Company

As per the Notification of the Ministry of Corporate Affairs (MCA), dated June 5, 2015, they exempted specific provisions of the Companies Act, 2013, which shall not apply to Private Limited Companies or shall only apply according to the exemptions as stated in their Notification.  The exemptions which apply to Private Limited Companies are:-[3]

  1. Restriction on Purchase of Own Shares.[4]
  2. Issue of Shares with Differential Rights.
  3. Loans to Directors and Interested Entities.[5]
  4. Related Part Transactions.
  5. Exemption from provisions dealing with corporate borrowings and creation of charge on Assets.
  6. Acceptance of Deposits.

Director of Private Limited Company

A Director of a Private Limited Company has many privileges and benefits. A minimum of two directors is required for a private limited company and two members and two shareholders to register itself legally. The director of a private limited company plays a very significant role in working for a company. A maximum of fifteen directors is allowed in accompany as per the Companies Act, 2013. Specific requirements need to be fulfilled for a person to become a director in a private limited company.

The Companies Act does not provide an exhaustive definition of a director. According to Section 2(34), a director means ―director means a director appointed to the Board of a company.

Types of Directors

There are certain types of directors in a Private Limited Company. Namely:

  1. A Managing Director.
  2. An Executive Director.
  3. An Ordinary Director.
  4. A Nominee Director.
  5. An Alternate Director.
  6. A Professional Director.

Securities Under Private Company

Section 2(81) of the companies Act defines securities as shares, debentures, bonds, stocks, etc. Securities means traded financial instruments which can be bought or sold.

The question which arises here is whether Private companies can issue Securities or not? Hence, from the definition provided under the Act in section 2(81), it is made clear that private companies can issue securities and have members and shareholders. Still, their shares cannot be traded on public exchanges. Private limited companies’ shares are less liquid since it is traded amongst the few closely related and connected investors.

There are three modes through which Private companies can issue securities. That is:-

  1. Private Placement.[6]
  2. Bonus Issue.[7]
  3. Right Issue.[8]

Incorporation of Private Limited Company under the Companies Act

The Ministry of Corporate Affairs has made a straightforward process of company registration, enhancing the easiness of doing the business. Section 3(1) of the Companies Act prescribes a method of incorporating a private limited company under the companies act. They have provided a step-wise course of action from incorporating a private limited company under the companies act. Steps are:-

  1. Obtain DIN of proposed Directors- DIN is an eight-digit Directors Identification Number.
  2. Obtain DSCs of subscribers- Digital Signature Certificates.
  3. Verify the company’s name availability.
  4. Draft MOM & AOA of the firm. (Memorandum of Association) and (Article of Association)
  5. File form number INC 32.
  6. Get the PAN, TAN ND COI.
  7. Authentication of registered office in INC 22Form.
  8. The requirement of Company Name Board & official publications.
  9. Selector of Auditor.

Conclusion

As per the Companies Act 2013, private companies have brought many changes in the definition of Private Company and their working. All the Private Limited Companies welcomed the recent amendment and notification in 2015 because it helps ease the doing of business and formation of the company. The Public Companies has its option limited if compared to Private Companies placement about Bonus, Issue of Share and IPO. Hence, a Private Limited Company, according to the Companies Act, is very vast in its working.


[1]  The words ―of one lakh rupees or such higher paid-up share capital‖ omitted by Act 21 of 2015, s. 2 (w.e.f. 29-5-2015).

[2] Shivani Kharai, Private Companies and Securities LEGEX Insights. Published on Sep, 2020.

https://medium.com/legex/private-company-and-securities-ef117823482c

[3]Nikhil Joseph, Ruchir Sinha, Sangeeta Rana, Companies Act 2013 Amended: Private Company Exemptions Reinstated, Mondaq. Published in July,2015.

https://www.mondaq.com/india/shareholders/409358/companies-act-2013-amended-private-company-exemptions-reinstated

[4] The Companies Act, Section 67(1), Act of 2013. (India)

[5] The Companies Act, Section 185, Act of 2013. (India)

[6] The Companies Act, Section 42, Act of 2013. (India)

[7] The Companies Act, Section 63, Act of 2013. (India)

[8] The Companies Act, Section 62, Act of 2013. (India)

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