Background
The Companies Act, 2013 (herein referred to as “the Act/Act”) has introduced several provisions regulating borrowings and private placements by companies. Subsequently, the Ministry of Corporate Affairs (MCA) granted various exemptions to private companies through notifications. One such exemption has given rise to an apparent inconsistency when read alongside the provisions governing private placement of Non-Convertible Debentures (NCDs).
This article examines the chronology of the relevant provisions and analyses whether a private company can simultaneously claim the exemption from passing a special resolution under Section 180(1)(c) and the exemption under Section 42 for issuance of NCDs.
Chronology of Relevant Provisions
- Notification of Section 180
Section 180 of the Companies Act, 2013 was notified with effect from 12 September 2013 which provides certain conditions for borrowings for any COMPANY registered under the Act :
“the Board of Directors shall exercise the power to borrow money, where the money to be borrowed together with the money already borrowed exceeds the aggregate of the company’s paid-up share capital, free reserves and securities premium, only with the consent of the members by way of a special resolution”
- MCA Notification dated 5 June 2015
The Ministry of Corporate Affairs, vide Notification G.S.R. 464(E) dated 5 June 2015, granted exemptions to PRIVATE companies out of which One of the significant exemptions provides that:
“Section 180 shall not apply to a PRIVATE company”
Accordingly, a private company is no longer required to obtain shareholders’ approval by way of a special resolution under Section 180(1)(c), irrespective of the amount of its borrowings.
- Notification and Amendment of Section 42
Section 42 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, (herein refereed to as “Rule 14” ) to Private Placement was also brought into force on 12 September 2013. Thereafter, the provision underwent substantial amendments through the Companies (Amendment) Act, 2017, effective 7 August 2018 in which specific exemption is given for those COMPANIES who are issuing NCD’s which exceeds the limits of Section 180 (1) (c ) to not comply with sub-reg 14(1) i.e. passing of special resolution for issuance of NCD’s via private placement in case a prior approval under section 180 (1) (c) exists. The extract of the second and third proviso to rule 14 has been provided below:
“Provided further that this sub-rule shall not apply in case of offer or invitation for. non-convertible debentures, where the proposed amount to be raised through such offer or invitation does not exceed the limit as specified in clause (c) of sub section (1) of section 180 and in such cases relevant Board resolution under clause (c) of subsection (3) of section 179 would be adequate”
“Provided also that in case of offer or invitation for non-convertible debentures, where the proposed amount to be raised through such offer or invitation exceeds the limit as specified in clause (c) of sub-section (1) of section 180, it shall be sufficient if the company passes a previous special resolution only once in a year for all the offers or invitations for such debentures during the year”
A tabular representation has been given below to simply the anomaly:
| Compliance Requirement | Public Company | Private Company |
| Section 180(1)(c) Special Resolution required for borrowings beyond limits | ✓ | ✗ (Exempt vide MCA Notification dated 5 June 2015) |
| Eligible to rely on Section 180 Special Resolution for exemption under Rule 14(1) | ✓ | ✗ ( No Section 180 resolution exists because of exemption) |
| Separate Section 42 Special Resolution required for NCD issue where borrowings exceed Section 180 limits | ✓ | ? Ambiguous |
The Apparent Anomaly Since Section 180 does not apply to a private company, the question arises whether a private company can issue NCDs of any quantum solely via a Board resolution under Section 179(3)(c), or whether it must still pass a special resolution under Rule 14.
Two Schools of Thought
School 1: The Blanket Exemption Approach Section 180 is not applicable to a private limited company by virtue of the MCA exemption notification Consequently, pursuant to the second proviso to Rule 14(1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (PAS Rules), a Board resolution passed under Section 179(3)(c) constitutes sufficient compliance for the issuance of Non-Convertible Debentures (NCDs) via private placement under Section 42 of the Companies Act, 2013.
Thus, requiring a private company to pass a special resolution under Section 42 for every offer of non-convertible debentures (NCDs) on the premise that Section 180 does not apply indirectly reintroduces a compliance burden from which the Ministry of Corporate Affairs (MCA) expressly exempted private companies via its official notification.”
Accordingly, under the first approach the interpretation can be that since there is no limit for borrowings under section 180 for private limited companies, a board resolution passed under section 179 shall be a sufficient compliance under section 42 of Companies Act, 2013 and thus it can be said that the inability to satisfy this condition under Rule 14 is a consequence of a statutory exemption and not of any non-compliance and therefore private companies should not be denied the benefit intended under Rule 14 of the Act.
However, will this approach actually sever the intention of Section 42 read with Rule 14 of the Act? Will it not render the second proviso redundent?
Harmonious Interpretation: Treating Section 180(1)(c) as a Mathematical Benchmark
The exemption provided under Rule 14 for issuance of NCD’s is principally to avoid duplication of approvals taken to the shareholders of the Company and thus once the shareholders have approved the overall borrowing capacity under section 180 (1) (c ) of the Act, the issuance of non-convertible debentures ordinarily represents only the mode or instrument through which that borrowing authority is exercised via Section 42 read with Rule 14 of the Act.
Now, while analysing this from the lense of a private Company, basis to the exemption received via MCA Notification; section 180 has been exempted to private companies and thus, any amount of borrowings can be done by a private company via Board resolution under Section 179 of the Act without taking the matter to the shareholders of the Company.
Thus an alternative view may be that the exemption granted to private companies from Section 180 cannot be extended so as to dilute the independent approval requirement prescribed under Section 42 read with Rule 14. The MCA Notification dated 5 June 2015 only exempts private companies from the restrictions on the borrowing powers of the Board under Section 180. It does not expressly exempt them from the private placement framework under Section 42 or from the requirement of obtaining shareholders’ approval for an offer or invitation of non-convertible debentures.
Treating a Board resolution under Section 179(3)(c) as a substitute for a special resolution under Section 42 lacks statutory backing and risks rendering the third proviso to Rule 14(1) redundant.
Applying the rule of harmonious construction which requires apparently conflicting provisions to be interpreted in a manner that preserves the operation and purpose of each provision, the reference in Rule 14(1) to the “limit as specified in clause (c) of sub-section (1) of section 180” must be construed as a numerical benchmark (aggregate of paid-up share capital, free reserves, and securities premium) rather than a condition precedent regarding the operative applicability of Section 180 itself. This interpretation reconciles both provisions effectively: it preserves the Board’s unrestricted general borrowing power under Section 180 for private companies while retaining shareholder oversight under Section 42 read with Rule 14 whenever NCD issuances breach the statutory financial threshold.
Conclusion
The interplay between the exemption granted to private companies under the MCA Notification dated 5 June 2015 and the exemption available under Section 42 read with Rule 14 presents a genuine interpretative issue under the Companies Act, 2013.
While one line of reasoning, based on the rule of harmonious construction, suggests that a private company should not be denied the benefit of Rule 14 merely because it is statutorily exempt from Section 180, an equally plausible interpretation is that the relaxation under Rule 14 is predicated upon prior shareholder approval of the company’s borrowing capacity under Section 180(1)(c). Since a private company does not obtain such shareholder approval, the very foundation for dispensing with a separate special resolution under Section 42 may be absent.
Thus, from a legal-risk and governance perspective, obtaining a special resolution under Section 42 read with Rule 14 for the private placement of non-convertible debentures by a private company, particularly where the proposed borrowings exceed the thresholds referred to in Section 180(1)(c), appears to be the more prudent and defensible course. Such an approach mitigates potential compliance risk without materially prejudicing the company’s ability to raise funds.
The article is written by
Krishna Shah – Senior Manager
This article is published on taxguru link below.