it would be interesting to understand why the restructuring of Articles of the Company is essential in the era of exemptions granted to private company under the Companies Act 2013

1. Structuring Articles
in the era of Private Company
exemptions & SS

2. Presentation
by
CS Makarand Lele
Disclaimer: Views are strictly personal
Central Council Member
Institute of Company Secretaries
of India

3. Game Changer
• Articles is subordinate set of regulations
• It can’t override the main frame of the act
• Usually meant to manage the intra stakeholder
relationships
• MCA notification 5th June 2015 offered exemptions
to private companies
• Various procedural exemptions were granted
through articles
• Simultaneously Secretarial Standards on Board &
General Meetings were made mandatory to all
companies

4. • Review of relevant Sections of Companies Act 2013
• Understand exact nature of exemptions granted by MCA to private
Companies
• Review applicability of SS provisions to Private Companies
• Provide best possible solutions to private companies to rip the
maximum advantage of exemptions
• Maintain the sanctity of Secretarial standards
• Structure the Articles after understanding the needs of an
organization
• Protect the interest of stakeholder – expectation of MCA

5. Companies Act 2013 – relevant provisions
• S 2 (5) – defines articles as originally framed or altered or applied
• S 5 – Articles of Association & Tables provided in Schedule 1 –
regulations of management of the Company
• Companies registered prior to 1st April, 2014 can continue with its old
articles
• S 6 – Act to override Articles provisions
• S 7 – Articles should be registered at the time of incorporation
• S 10 – Articles when registered are binding on all members & they
have to observe all its provisions
• S 14 – Articles can be altered through Special resolution
• S 117 – Attachment of copy resolution to Articles having effect of
alteration

6. Secretarial Standard 1 & 2
• S 118 (10) every company has to observe SS with respect to General
& Board meetings specified by ICSI as approved by CG
• ICSI notification dated 23rd April, 2015
• SS are effective from 1st July, 2015
• SS 1 applicable to board meetings & committee meetings
• SS 2 applicable to general meetings, creditors meetings, class
meetings, court convened meetings
• If because of any subsequent modifications, any part of standard
becomes inconsistent with the Act, then Act shall prevail

7. Elements
of
Articles
Status
clause
Operative
clauses
JV/
Promoter
perception
clauses
Exemption
clauses
Entrenchment
clause

8. Operative clauses
• S 2 (54) appointment of MD by making provisions in the articles
• S 2 (68) private company restrictions to qualify as Private
• S 5 entrenchment provisions
• S 7 first directors appointment through the articles
• S 10 (2) all monies payable by a member under Articles is debt due from
him – automatic operation
• S 44 manner of transfer of shares or debenture or other interest of a
member is to be provided in the articles
• S 48 provisions of variation of shareholders right is to be provided in the
articles
• S 50 company can accept advance call money even if not called for
• S 51 dividend in proportion to paid up value can be paid
• S 55 issue of preference shares

9. • S 61 alteration of MOA
• S 62 restriction on renunciation of right offer
• S 63 issue of bonus shares
• S 68 buy back of shares & other specified securities
• S 85 restriction on inspection of register of charges by any other person
• S 88 maintenance of foreign register of members
• S 103 specifying more number as quorum for general meeting
• S 104 specifying chairman of the general meeting
• S 115 prescription of resolutions requiring special notice
• S 119 placing of reasonable restriction on inspection of minutes book of
general meeting
• S 152 retirement of directors

10. • S 161 power to appoint additional director/ alternate director/ filling up of
casual vacancy/ nominee director
• S 164 additional disqualification for appointment of director in private
company
• S 166 director to act in accordance with the articles
• S 167 additional grounds for vacation of office by director in private
company
• S 174 adjournment of meeting
• S 179 prescription of powers of the board
• S 197 remuneration to directors can be prescribed in the articles
• S 203 appointment of MD/ CEO as chairperson
• S 304 determination of period of existence of the company
• S 320 restriction on distribution of assets of the company in winding up
against liabilities

11. Private Company Exemption Notifications

12. • Companies Amendment Act 2015 made effective from 29th May 2015
• Private Company exemption notification dated 5th June 2015 issued
under S 462 in the form of directives of CG in public interest
• Both set to supersede provisions of Companies Act 2013
• Also prevails over the SS 2 provisions which becomes inconsistent in
the context
• Procedural exemption operates through provisions in the Articles –
conditional
• These set of exemptions are mainly for general meeting processes

13. Why Review of Articles is necessary?
• Companies are permitted to make provisions of their choice in the
Articles to avail the exemptions
• In order to secure exemption benefits
• For certain exemptions there shall be enabling provisions in the
articles
• Three cases to be dealt separately;
• Companies continuing with 1956 Articles
• Articles adopted as per 2013 act before exemption notification
• Companies to be formed after exemption notification
• Amendment in Articles requires approval of 75% shareholders
• Requirement to ensure minority interest protection

14. Is there any intention to sidestep SS compliance?
• SS mainly secures transparency & disclosures
• SS is a tool to protect public & financial interest
• Current law has sufficient in built mechanism of placing disclosures in
public domain by all companies (extensive information in returns & forms)
• Private Companies mostly family owned & don’t carry any public or
financial interest
• Do they really need such high level disclosures and procedural compliances
through SS?
• By rightfully applying exemption through articles, intent of SS & law can be
secured
• government requires the Companies to protect the interest of shareholders
while taking benefit of exemptions

15. Employment of exemptions – Role of CS
• Study existing set
• Understand the need
• Derive out best solution to give
justice to intent of SS & Law
• Prepare simple & meaningful
draft
• Implement the change

16. Requirement of Minimum Paid up capital
• Minimum paid up capital requirement has been removed
by amendment Act.
• Companies to be formed now need not have to mention
minimum paid up capital in its MOA/ AOA
• What is the impact of this?
• Existing companies what to do?

17. S 43 – Kinds of Capital
Suggested Changes in Articles
• Private Company can have any other kind of capital than equity &
preference
• Can create hybrid instrument
• Can restrict/ expand rights of preference shares over equity
Expected Relief from SS
No such SS

18. S 47 – Voting Rights
Suggested Changes in Articles
• The proportion to the voting rights linked to paid up capital and to
combination of equity and preference shares in total paid up capital can be
flexibly amended (Sub section 1)
• The period of two (2) years default in payment of dividend on preference
shares for acquiring voting rights can be reduced or extend (Proviso 2 of Sub
section 2)
• If company is creating third kind of capital then provision can be made for
proportion of its voting rights with equity/ preference in entire paid up
capital
Expected Relief from SS 7.5.1
• No need to comply with requirement of Initial voting by show of
hands & proportional voting by equity & preference

19. S 101 – Notice of meeting
Suggested Changes in Articles
• Any general meeting can be called by giving notice of lesser than twenty one
(21) days (Sub section 1)
• Calling of general meeting by shorter notice can be done by obtaining
consent of members less than 95% of the members entitled to vote at such
meeting (Sub section 1)
• The notice of every meeting need not contain statement of business (Sub
section 2)
• Notice of every meeting shall be given only to members & Auditors and
nobody else (Sub section 3)

20. However SS for following continues to operate
• 1.2.3 – placing of notice & route map on website
• 1.2.4 – providing route map & landmark for location of meeting
along with notice
• 1.2.6- in case the company sends the Notice by post or courier, an
additional 2 days shall be provided for the service of Notice
• 1.2.10- Notice shall be accompanied, by an attendance slip and a
Proxy form with clear instructions for filling, stamping, signing
and/or depositing the Proxy form.
• 1.2.11- A Meeting convened upon due Notice shall not be
postponed or cancelled
Expected Relief from SS 2 – 1.2 Notice
• No mandatory requirement to observe the following
• Notice period minimum 21 days
• Notice to be given to the secretarial auditor, debenture trustees or to other
specified persons

21. S 102 – Statement to be annexed to notice
Suggested Changes in Articles
• Explanatory statement need not be given along with notice for special
business (Sub section 1)
• Documents can made available for inspection in electronic form or can have
some restrictions on its availability to members (Sub section 3)
• Quantum of compensation required to be payable by directors or KMP on
account of non-disclosure or insufficient disclosure may be restricted (Sub
section 4)
• If company provides that no disclosures are required to be given then can
even make sub section 4 not applicable
Expected Relief from SS 2 – 1.2 Notice
No mandatory requirement to observe the following
• Explanatory statement should be given along with notice

22. S 103 – Quorum for meetings
Suggested Changes in Articles
• Quorum can be two (2) members personally present or through proxies can
be provided [Sub section 1 (b)]
• It can be provided that adjournment can happen within a lesser period than
seven (7) days (Sub section 2)
• It can provide that no publication of notice in newspaper is required for
changes in day, time or place of adjourned meeting (Proviso to sub section 2)
• For adjourned meeting requirement of specific quorum, number can be
provided (Sub section 3)
Expected Relief from SS 2 – 3. Quorum
No need to comply following
• Proxies shall be excluded for determining the Quorum

23. S 104 – Chairman of meetings
Suggested Changes in Articles
• Chairman can be elected from the directors, whether he is
member or not and only by show of hands (Sub section 1)
Expected Relief from SS
No restrictions in SS

24. S 105 – Proxies
• Can be used to entitle foreign national to appoint proxy to vote
Suggested Changes in Articles
• Company can have restriction that proxy should be a member of the company to
attend and vote at the meeting (Sub section 1)
• Proxy can speak at the meeting and can vote on show of hands and on poll (Proviso
to Sub section 1)
• Statement in the notice can be suitably worded (Sub section 2)
• Flexibility for deposit of proxy can be provided by specifying lesser or higher period
than forty eight (48) hours (Sub section 4)
• Format of instrument of proxy can be different and can be deposited through email
(Sub section 6)
• However requirement of payment of stamp duty of fifteen (15) paise on proxy form
as per article 52 of The Indian Stamp Act, 1899 needs to be ensure
• Inspection of proxies period can be amended or it can be totally prohibited also
(Sub section 8)

25. Expected Relief from SS- 6.1
No mandatory requirement to observe the following
• 6.1 Proxy need not be a member of the Company
• 6.6.1 Proxies shall be deposited with the company not
later than forty-eight hours
• 7.3 A Proxy cannot vote on a show of hands
• 7.4 Proxy cannot speak at the Meeting

26. However SS for following continues to operate
• 6.5.1 A Proxy form which does not state the name of
the Proxy shall not be considered valid.
• 6.5.2 Undated Proxy shall not be considered valid.
• 6.5.3 If a company receives multiple Proxies for the same
holdings of a Member, the Proxy which is dated last shall be
considered valid; if they are not dated or bear the same date
without specific mention of time, all such multiple Proxies
shall be treated as invalid.

27. S 106 – Restriction on voting rights
Suggested Changes in Articles
• Articles can provide that defaulting member can also
exercise his right to vote (Sub section 1)
• More grounds to prohibit members from exercising voting
rights can be provided in articles (Sub section 2)
• On poll articles can specify that member has to exercise all
his votes in a same way (Sub section 3)
Expected Relief from SS
No restrictions in SS

28. S 107 – Voting by show of hands
Suggested Changes in Articles
• Articles can provide that all resolutions would be voted only by poll –
means each share will have one vote
Expected Relief from SS
No mandatory requirement to observe the following
• 7.5.1 Every Member entitled to vote on a Resolution and
present in person shall, on a show of hands, have only one
vote irrespective of the number of shares held by him.

29. S 109 – Demand for poll
Suggested Changes in Articles
• Poll can be demanded by any member (Sub section 1)
• Even before voting by show of hands
Expected Relief from SS
No restrictions in SS

30. Drafting from JV perception
• Binding nature of JV agreement
• Shareholding pattern pursuant to JV agreement
• Restriction on transfers/ lock in period
• Tag-along rights
• Right of first offer
• Method of valuing shares
• Methodology of taking decisions
• Reserved matters
• Constitution of the Board
• Process of Appointment of nominee director
• Additional quorum specifications

32. Presentation by CS Makarand Lele
makarand.lele@mrmcs.com
9822394381