New Companies Act of 2013 will push many a company to turn a private limited one

A private company will have an easier life than a public one under the new Companies Act

The 104-year-old T. V. Sundram Iyengar & Sons (TVS & Sons) Ltd., the holding company of the $6.5-billion TVS Group, announced plans to convert itself into a private limited company from public company.

“The board and the shareholders of TVS & Sons have approved this proposal as the new Companies Act facilitates the same and this reflects the shareholding structure of the company, that is, family-owned,” it

said in a statement.

Is there a trend in this?

Experts are of the view that the new Companies Act of 2013, which came into effect from April 1 last year, will push many a company to turn a private limited one. For one, the new Act has made disclosure norms stricter for public companies in terms of having independent directors and having woman directors on their boards.

For another, it imposes restrictions on giving loans to directors.

“There is no incentive to remain a public company under the new Companies Act as disclosure norms have become stringent, and it is hard to do business,” says Suresh Surana, Founder of RSM Astute Consulting Group.

“If you are a company which does not want to raise money from public either through capital markets or via public deposits, then there is no incentive for to you to remain a public company,” he points out.

Draft notification

According to Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG in India, being a private company is comparatively less onerous than being a public company under the new Companies Act. 

He also pointed out that a draft notification which seeks to exempt private companies from several onerous requirements of the Companies Act, including those on related party transactions, classes of share capital, loans to directors, etc, has been tabled in both houses of Parliament and is expected to be notified on conclusion of the current session in May. 

“Once these exemptions become effective, the compliance requirements for private companies would be considerably reduced and provide the much needed relief to private companies."

Vinod Kothari, a company law practitioner, points out the advantages for the private company versus the public company under the new Companies Act. “A private company need not have independent directors, need not have an audit committee or the managerial remuneration is not capped when compared to a public company. This along with the proposed amendments makes life more easy as a private company,” he adds.

The new Companies Act has already pushed many to rethink on their strategies. According to data available on Ministry of Corporate Affairs' website, the number of new companies incorporated has dropped 40 per cent between April-December 2014, when compared to the comparable period.

At the same time, the number of limited liability partnerships (LLPs) has gone up by 67 per cent in the same period.

According to Mr. Surana, many companies are toying with the idea of converting into to private companies or even limited liability partnership (LLPs). “In LLPs, however, taxation could turn out to be a major issue,” he feels.