Definition of private company [Sec. 2(68)]
‘Private company’ means a company having such minimum paid-up share capital as may be prescribed, and which by its articles,
(i) restricts the right to transfer its shares;
(ii) except in case of OPC, limits the number of its members to 200:
(iii) prohibits any invitation to the public to subscribe for any of its securities
Provided that where 2 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..
Analysis of definition of private company Restrictions in articles The articles of a private company must contain the following three restrictions :-
(a) The right to transfer the shares shall be restricted.
The articles of a private company must provide restrictions on transferability of shares. However, the articles cannot impose prohibition on transferability of shares. In other words, there cannot be a complete ban on transfer of shares. The restrictions must be applied uniformly on all the members of the company. In other words, the articles must not discriminate between the members regarding their right to transfer the shares.Generally, the articles of a private company contain the following grounds restricting the transfer of shares:
(i) Where the shares being transferred are partly paid up and the transferee is an insolvent or a minor, such transfer shall not be allowed.
(ii) Where a member intends to transfer his shares, he shall give a notice to the company of his intention to transfer such shares, and if no existing member is willing to purchase such shares, only then the member can transfer his shares to any person of his choice.
(iii) Where the company has lien on the shares held by a member, the member shall not be entitled to transfer such shares.
(iv) Where the instrument of transfer of shares deposited with the company is incomplete or defective or not properly stamped, the transfer of shares shall be refused.
(v) Where a member intends to transfer his shares at a price mutually agreed between him and the buyer of shares, such transfer shall not be made except at the price determined by the auditor of the company or by the members in general meeting.
(vi) Where shares were allotted by the company to an employee of the company, such member-employee shall transfer his shares only to an existing member of the company.
(b) The number of members shall be limited to 200. While computing the number of members for this purpose, following provisions shall apply:
(i) Joint holders of shares shall be counted as one member only.
(ii) The employees (both current and former) of the company who became members by virtue of their employment, shall not be considered while counting the limit of 200 members.
(iii) The employees of the company who became members by virtue of their employment, shall not be counted, even though they have, as on date, ceased to be the employees of the company. In other words, ex-employees (or former employees) shall not be considered while counting the limit of 200 members.
(c) The company is prohibited from making any invitation to public to subscribe for any securities. In other words, a private company shall not make a public issue of its securities.
Minimum Capital Requirement:
Earlier, the Companies Act, 2013 mandated a minimum capital of ₹100,000 in order to incorporate a private limited company. However, the amendment Act, in 2015 repealed the provision.
Authorised Capital of a Private Limited Company:
Authorised capital marks the maximum share capital out of which shares can be issued in a private limited company. This authorised capital is usually cited in the Memorandum of Association of the company and is mostly fixed as ₹100,000. However, it can be increased with the consent of the shareholders and by paying the required fee to the Registrar of Companies (RoC). The authorised capital denotes the net worth of a company.
For instance, say a company XYZ private limited has an authorised capital of 5 lakhs. This would imply that this company can issue shares, worth up to 5 lakhs to its shareholders. While the company can decide to issue shares lesser than the decided authorised capital, say 3 lakhs, the company cannot exceed the threshold limit of 5 lakhs.
Paid-up capital of a Private Limited Company:
Paid-up capital, on the other hand, is the actual amount of money that is acquired by the company by means of issuing shares to the shareholders. The paid-up capital is always lesser than the authorised capital of the company, as the company cannot issue shares over and beyond the authorised capital. The paid-up capital thus received is often utilised for managing the expenses of the company.
Earlier there was a prerequisite pertaining to the minimum paid-up capital of a private limited company wherein it was mandatory to have a capital of ₹100,000. This would imply that a minimum of ₹100,000 should be used to purchase the shares by the shareholders to commence the business. However, the Companies Amendment Act, 2015 repealed this requisite, thus enabling the entrepreneurs to incorporate private limited companies with no hindrances.
Prior to the amendment, it was mandatory to deposit the stipulated ₹100,000 in the company’s bank account. Now that the provision is repealed it’s merely enough to state the paid capital on the papers.
With this provision in place, many company registration and business have started to prefer private limited companies over other corporate structures such as Limited Liability Partnership (LLP) firms, as in the latter raising funds is a huge challenge. A private limited company was always favored for the limited liability, tax efficiency, and credibility it offers amongst the clients. The mandate for the minimum capital being torn down has definitely leveraged the scope of private limited companies and has pushed it a little ahead in the race amongst the corporate entities.
