CHAPTER 1

INTRODUCTION

A private company is a company with private ownership, i.e., a company whose shares may not
be offered to the public for sale and which operates under legal requirements less strict than
those for a public company. In general, the shares of these businesses are less liquid, and the
values are difficult to determine. Section 3(1) (iii) of the Companies Act, 1956 defines a private
company as one which:

 Has a minimum paid-up share capital of Rs.1 Lakh or such higher capital as may be
prescribed; and
 By its Articles Association:
 Restricts the right of transfer of its share;
 Limits the number of its members to 50 which will not include members who are
employees of the company and members who are ex-employees of the company and were
members while in such employment and who have continued to be members after ceasing
to be employees;
 Prohibits any invitation to the public to subscribe for any shares or debentures of the
company; and
 Prohibits any invitation or acceptance of deposits from persons other than its members,
directors or their relatives.

The Companies Act 2013 introduced few changes in the definition for a private company, first
the new requirement increases the limit of the number of members from 50 to 200 and secondly,
the definition does not state that a company inviting or accepting deposits from persons other
than its members, directors or their relatives cannot be a private company.
 CHAPTER 2

Features of Private Companies

These are some features that distinguish private companies from other types of companies:

 No minimum capital required: There was a minimum paid-up share capital requirement
of Rs. 1 lakh previously, but that is omitted now.
 Minimum 2 and maximum 200 members: A private company can have a minimum of just
two members (but just one is enough if it a One Person Company), and a maximum of up
to 200 members.
 Transferability of shares restricted: Private companies cannot freely transfer their shares
to the public like public companies. This is why stock exchanges never list private
companies.
 “Private Limited”: All private companies must include the words “Private Limited” or
“Pvt. Ltd.” in their names.
 Privileges and exemptions: Since private companies do not freely transfer their shares
and involve limited interest by members, the law has granted them several exemptions
that public companies do not enjoy.

Types of Private Companies

Private companies are of three types depending on their members’ liabilities:

(A) Limited by shares: The liability of the members is limited to the amount unpaid to the
company with respect to the shares held by them.
(B ) Limited by guarantee: Here the members’ liabilities are limited to the amount of
money they guarantee to pay in case the company is wound-up.
(C) Unlimited liability: The liability of members is unlimited in this type of private
companies. Personal assets of members can be attached and sold when the company is
being wound-up.

In terms of the number of members, a private company can also be a One Person
Company. These types of companies have just one member/shareholder as their
promoter. The new Companies Act of 2013 introduced such types of companies.

Further, even small companies that have limited paid-up share capitals and turnover
amounts, as defined under Section 2(85), are treated as private companies under Indian
company law.

Formation of Private Companies

Minimum 2 and maximum of 200 members can come together to form a private company
by submitting an application to that effect to the Registrar of Companies along with a
subscribed copy of their Memorandum of Association and other required documents after
payment of prescribed fees.

The Memorandum must state the name of the company (which should include the words
“Private Limited”), the address of its registered office, its objects and purposes, and
extent of liability of its members. It must also mention the details of subscribers to the
Memorandum.

Apart from this, the Companies Act has also prescribed certain other compliances, such
as requirements relating to names of private companies, their Articles of Association,
details of members, transferability of shares, etc.
 CHAPTER 3
PRIVILEGES AND RESTRICTIONS OF PRIVATE COMPANIES

3.1Privileges of Private Companies

A private company is granted a number of privileges. These are as follows:

 Number of members: A private company can be shaped with only two members.
 Commencement of business: A private company can start its business
immediately after its incorporation.
 Minimum subscription: A private company can allot shares without waiting for
the minimum subscription to be received.
 Prospectus: A private company need not issue a prospectus or file with the
Registrar of companies a statement in lieu of prospectus before allotment of its
shares.
 Assistance for purchase of shares: A private company can help its prospective
member or members financially for the purchase of its own shares.
 Subsequent issue of shares: A private company is not required to offer further
shares first to the existing shareholders i.e., it can issue further shares even to the
outsiders.
 Statutory meeting and statement: A private company need not hold a statutory
meeting or file a statutory statement with the Registrar of companies.
 Provisions concerning directors: A private company may have a minimum of two
directors. They need not file their consent to act as such with the registrar. They
need not hold qualifying shares.
 Quorum: Only two members who are personally present at the common meeting
of shareholders shall form the quorum, unless otherwise provided in the articles.
 Demand for Poll: If a resolution is being discussed in a meeting and the number
of members are seven or less than seven a poll may be demanded through only
 one member. If more than seven members are present, such a poll may be
demanded through only two members.
 Managerial remuneration: The restriction on the managerial remuneration i.e. per
cent of net profit is not applicable to a private company.

3.2 RESTRICTIONS ON A PRIVATE COMPANY

Along with the privileges accessible to a private company, some restrictions have also been
placed. You have learnt in relation to the three restriction placed on a private company through
its articles viz., (a) restriction on the right to transfer shares, restriction on the maximum number
of the members exceeding fifty, and prohibition on invitation to the public for investment in its
shares or debentures. Besides these, a private company is also subject to the following
restrictions:

 A private company cannot issue share warrants payable to bearer.

 Under Section 159 private companies are required to send an annual list of their members
and a summary of sure particulars to the Registrar of companies. A private company is
also required to send with this return, a certificate, certifying that the company has not,
since the last return, made any public invitation inviting the public to subscribe for its
shares or debentures. It is also required to certify that where the annual return shows the
number of members of the company exceeds fifty; the excess consists of those persons
who are not to be incorporated in counting the number of fifty.
 A private company is an annually required to certify to the Registrar that since the last
annual common meeting,

(a) no body corporate has held twenty-five per cent or more of its paid up share capital,

(b) the company itself did not hold twenty-five per cent or more of paid up capital of one
or more public companies,

(c) its average annual turnover throughout the preceding three years did not exceed ten
crores rupees, and

(d) the company did not accept or renew deposits from the public.
  The member of a private company is not allowed to appoint more than one proxy to
attend and vote at a meeting of the company.

Conclusion

Private companies have a vital role to play in the growth of the economy. Most of the start-ups
are floated as private companies and therefore it is important that such companies are not
pressured with cumbersome compliances. The Companies Act, manifestly one of the most
important instruments of doing business in India, must occupy a key place in the Prime
Minister’s goal of making India a good place to do business. In this context, the exemption
notification for private companies is a much awaited one. With these exemptions, it is far
expected that many companies would be able to carry on.