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Rules Regarding Maximum Shareholding in a Private Company

Swarit Advisors

| Updated: Mar 27, 2019 | Category: News, Private Limited Company

The Companies Act 2013 of Indian constitution comes with the definition of private limited company. It says that private companies are companies which are restricted in regard of transferability of its shares. Basically, the law prevents large share subscription from public for such companies. This is actually the major difference between public companies and private companies in India.

To be precise, private limited companies are allowed to have only 200 shareholders. The number, however, does not include the present as well as former employees who are also members of the private companies. Another notable thing is that more than two persons, who jointly have shares, will be automatically treated as one entity.

Different Shareholding Patterns for Different Companies

The shareholding pattern is different for different types of companies. So, at the beginning, we shall discuss on the shareholding pattern of private limited companies.

Shareholding Pattern for Private Limited Companies

At the beginning, companies act had also restriction on the share capital amount for the private limited companies. It used to state that maximum paid-up share capital should be 1 lakh (at Indian currency value). The rule is however omitted in 2005. With the amendment, now there is no restriction on the upper limit of the maximum paid-up share capital.

Private companies are divided into a few common types. Those types have been discussed in the following section.

  • Limited by Shares: In this case, liability of the shareholders is limited by shares. That means the amount unpaid by members to the company will be regarded as their liability.
  • Limited by Guarantee: The member of the private limited company should guarantee paying certain amount of money when the company seems to be wound-up.
  • Unlimited Liability: In this type of private limited companies, liability of the members is unlimited. When company faces difficult economic condition, personal assets of the members can be sold toad capital to the company.

Shareholding Pattern for One Person Company

At the above section, we have seen that private limited companies need at least 2 members for the formation. However, there is also a provision of one person company. This provision has been added in the year of 2013 as an amendment to the companies act. So, it is possible to start a private limited company even with one shareholder. Section 2(62) of the Companies Act comes with the definition of the one person company. In simple words, one person company is such a company where there is only one shareholder who possesses 100% of the company share. The shareholder has to nominate a person, who shall automatically become the owner of the share after the death of the present single shareholder. It is to be noted that once the one person company reaches the turnover above 2 Crores, the company should be converted into Private Limited Company. Thereafter, the company can no longer follow the shareholding pattern of the One Person Company (OPC).

Shareholding Pattern for Public Limited Companies

Under Section 2(71) of the Companies Act, the definition of the public limited company has been provided. According to this section, a public limited company should have minimum paid-up share capital amount of 5 lakh. In order to form the company, there must be at least 7 members, and the company is not limited by its share. At the same time, transfer of share is not restricted for the public limited companies. The company should have 3 directors, and it can invite public to buy its shares.

Legal Frameworks and Guidelines for Private and Public Company Shareholding

Private Limited Companies

For having a Private Limited Company in India, you must qualify to the following conditions:

  • Selling the Shares: Private Limited Companies cannot sell their shares by inviting people.
  • No Requirement of Minimum Capital: No limit is there for the maximum paid-up capital amount. Any amount can be paid. Directors can only deposit to raise business fund.
  • Number of Members: A private limited company should be formed with minimum 2 members. The maximum number of members of private company is 200. So, in other words, maximum number of shareholder is two hundred
  • Share Transferability: As per the companies act, share of the private companies cannot be transferred. This is the major difference of private limited companies and public companies. This is also the reason why private limited companies are not listed in the stock exchanges.
  • Annual Meetings and Directors: There is no need for appointing any independent directors. There is no requirement of preparing the report for the annual general meeting.
  • Remuneration Share of Director: Greater remuneration can be offered to the director. This is different from the public companies, where director revenue has upper limit.

Public Limited Companies

Like private limited companies, the public limited companies should also follow some rules or regulations. There is no legal binding for a person to hold share more than a certain percentage of the total share of the company. However, it is only applicable to the evolved companies that feature no promoter holding. As per SEBI guidelines, a company should have minimum 25% of the public shareholding. At the same time, it is to be noted that there is no requirement of minimum promoter group holding.

The Companies Act 2013 gives right to the management to have “control” on the public limited companies. As per the act, the definition of “control” means the management can have the following powers.

  • It has the right to appoint a majority of the directors.
  • Management team obviously has full freedom and right to manage different aspects of the company.
  • It also has the right to craft the policy decisions of the company.

Form Fill up and Related Attachments

For the Public Limited Company, directors have to obtain DSCs and DINs from the Ministry of the Corporate Affairs (MCA). This can be done by visiting the website of the MCA. Additionally, the directors have to fill up the forms, like INC – 22, DIR – 2 with ROC and DIR – 12.Similarly, shareholders in a Private Limited Company have to follow certain formalities. At the website of the MCA, all the forms can be obtained. They can be filled up and submitted online as well by the shareholders of the private limited companies.

Conclusion

Companies Act of India had undergone amendments in 2013 and 2017 respectively. With these amendments, a lot of things have been changed so that “ease of doing business” can be ensured for the investors or entrepreneurs. The amendments have focused on allowing flexibility in management control for the promoters and group of promoters. The new clauses also focused on the investor rights protection by introducing stater guidelines for management, minatory shareholder protection, requirement for independent directory and many more. All these new additions have successfully made things more transparent. Nevertheless, legal compatibility has become easier due to the new amendments to the old companies act in India. The efficacy of the new rules or amendments can be judged on the upcoming days. For now, it has to be stated that these changes were much required for making things simplified for the business owners, shareholders and stakeholders.

In case you have any further query associated with the rules regarding maximum shareholding in a private company, you can contact Swarit Advisors.

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