KEY PROBLEMS FACED BY PRIVATE COMPANIES UNDER COMPANIES ACT 2013

The companies act which gets executed in the year 2013 misses to being a rational legislature. In the country like India where family companies play a vital role in building the economy (2/3rd of GDP), this act failed to consider the nature of such private family companies. For example, a prohibition to issue loans to the director or related entities unless they will fulfil unreasonable condition laid down in section 185 of the Companies Act 2013. These provisions are very difficult to fulfil not only in the Indian context but anywhere in the world. In India, family companies hold capital closely and hence should be regulated with discretion. Later, on 5th June 2015, a notification was passed to reduce the procedural burden from the private companies according to which the private companies come into compliance with the legal letter considering investors as the known group of people.

Small and Medium Enterprises deploy around 40% of the workforce but generate only 17% of GDP. The concept of small companies emerges to corporatize small businesses but these companies have very limited exemptions and they are hardly spared from the wrath of the Act.  

Problems:

1. Delegated Legislature: Authority to make exemptions for private companies has shifted from legislature to executive, basically in the taxation laws where it requires constant change. This has led to uncertainty about the provisions for the private companies in future.
2. Postal Ballot: The provision of passing such resolution was for public companies only but under the Companies Act of 2013, it becomes mandatory for every private company whoever has the staff of more than 200 people.
3. Acceptance of deposits: If the private company wants to accept the money exceeding 100% of its share capital and reserves from any depositor then it has to follow the procedure laid down under section 73 (2) clause (a) to (e) according to which “the company has to pass issue circular including the financial position of the company, take credit rating, open deposit repayment reserve account, take deposit insurance” etc. This makes it almost impossible for any private company to do so without making surfeit of compliances.
4. Appointment of Directors: The process of appointing director in the private companies has changed now. As per section 152(2) unless otherwise, shareholders will decide the directors of the private companies. Probably this was not the intent of the legislature to make it more restrictive for the private companies than public companies but the notification passed in 2015 also didn’t provide any relief in this. 
5. Rights Issue: This provision earlier was only for public companies in which issue of shares to existing shareholders is must to prevent dilution of capital but now it has extended to private companies as well under section 62(1)(a).
6. Related party Transactions: As per section 188 of the Companies Act 2013, even private companies need to take approval from the shareholders in related party transaction which is again a burden. It’s to prevent abuse of excessive power by the director in related party transactions but generally, in private companies, there is no distinction between management and ownership.

The Companies Act of 2013 doesn’t only create problems for private companies but small companies and small listed companies are also facing several problems due to this Act.