Since a private company does not involve funds from the public, it needs less stringent control from the regulatory provisions. Accordingly, certain provisions of the Companies Act which are applicable to public companies do not apply to private companies.
These exemptions are referred as the privileges or advantages of a private company. These are:
A private company can be formed with only 2 persons as members.
A private company need not issue prospectus. It is also not required to file a ‘statement in lieu of prospectus’ with the Registrar before allotment of shares. Thus a private company is exempted from complying with the provisions of the Act regarding the issue of the prospectus.
Image Source: knitasia.com
3. Certificate of commencement of business:
A private company can start business immediately after incorporation. It need not apply for a certificate to commence business.
4. Minimum paid up capital:
A private company is required to have a minimum paid up capital of 1 lakh. [Sec.3 (l) (iii)]
5. Exemption regarding right issue:
A private company need not offer shares to its existing shareholders whenever it intends to increase its subscribed capital. (Sec. 81)
6. Exemption regarding share capital:
Restrictions applicable to public companies regarding kinds of share capital, voting rights, and issue of shares with disproportionate voting rights and termination of disproportionate excessive rights do not apply to private companies. (Sec. 85-90) Further, a private company can give financial assistance for the purchase or subscription of its own shares or its holding company.
7. Exemption regarding directors:
A private company enjoys following exemptions regarding directors:
(i) A private company may have 2 directors.
(ii) Restrictions on appointment of directors regarding undertaking to take up qualification shares and pay for them and filing consent of directors etc. are not applicable to private companies [Sec. 266 (5)].
(iii) All the directors may be appointed by a single resolution. (Sec. 255)
(iv) The directors need not retire by rotation (Sec. 256).
(v) The number of directors can be increased without the consent of the Central Government. (Sec. 259)
(vi) Persons holding an office of profit can be appointed as directors of a company without passing a special resolution. (Sec. 261)
(vii) The provision excluding an interested director from participating in voting at board’s proceedings does not apply to a private company. (Sec.300)
(viii) The provision requiring Government’s approval to the amendment of provisions relating to the appointment or reappointment of managing or whole- time does not apply. (Sec. 268)
(ix) The appointment of a whole-time managing director can be made without the consent of the Central Government. (Sec. 269)
(x) The provisions of the Act relating to number of companies of which a person can be a director, manager or managing director does not apply. (Sees. 386 to 388)
(xi) Prohibition regarding granting of loans by companies to directors does not apply. [Sec. 295(1)]
(xii) Restrictions on the powers of the Board regarding selling of the whole or substantially the whole of the company’s undertaking or remitting or giving time for repayment of a debt due by a director etc., are not applicable to private companies. (Sec. 293)
8. Exemption regarding managing director:
The restriction as to number of companies of which a person may be appointed managing director and prohibition of appointment of managing director for more than 5 years at a time are not applicable to private companies. (Sees. 316 & 317)
9. Exemption regarding managerial remuneration:
The provisions of the Act regarding fixing or increasing the remuneration of managerial personnel of the company are not applicable to private companies. (Sees. 198, 309, 310 & 311)
10. Audit committee:
A private company is not required to constitute an audit committee of the Board (Sec. 292A).
11. Exemption regarding statutory meeting:
A private company need not hold a statutory meeting and file a statutory report with the Registrar. (Sec. 165)
12. Exemptions regarding proceedings at meetings etc:
Provisions of sections 171 to 186 regarding conduct of meeting relating to notice, chairman, quorum, proxies, manner of voting, poll etc. do not apply to a private company to the extent the company has made its own provisions in its Articles. Privileges of a private company regarding proceedings at company’s meetings are:
(i) Only 2 persons personally present will form the quorum unless the articles provide for a higher number.
(ii) Poll can be demanded by one person if the number of members present does not exceed 7 and 2 if the number of persons exceeds seven.
(iii) Unless the articles provide otherwise, a member of a private company cannot appoint more than one person as the proxy to attend meeting on the same occasion.
(iv) It is not bound by the prescribed 21 days notice for calling a general meeting.
(v) A private company is not required to pass resolution by postal ballot (Sec. 192A)
13. Exemption regarding inter-corporate loans and investments:
The provisions of the Act relating to investment of funds by a company in other companies or companies under the same management are not applicable to private companies. (Sec. 372A)
14. Regarding Balance sheet:
A private company is required to file copies of balance-sheet and profit and loss account to the Registrar of Companies but no person other than member of the company is entitled to inspect the balance-sheet and profit and loss account. (Sec 220)
15. Exemption regarding power to prevent changes in the board:
The provisions of the Act giving power to the Company Law Board to prevent changes in the Board likely to affect prejudicially the company are not applicable to a private company. [Sec. 409]
Thus, a private company, on the one hand, is able to enjoy all the benefits of a joint stock company such as legal entity, perpetual existence, limited liability etc., and on the other hand, it is free from numerous legal restrictions which apply to a public company. This grants it a greater freedom of action than a public company in several respects.