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Private Limited Company Registration Articles
Preference Shares in a Private Limited Company

Preference share capital is the form of capital that provides preference rights to the holder at the time of payment of dividend and at the time of winding up.

Preference shareholders are the holders of shares who get the preferential rights of dividend and at the time of winding up company over the equity shareholders. Any company can issue preference shares only if its articles of association authorize the company to do so. Every company is required to redeem its preference share within a time period of 20 years. Further, according to companies Act 2013 no company can issue preference shares which are irredeemable.

Conditions to be satisfied for issuing preference share capital-

Any form of company can issue preference share capital only by fulfilling certain conditions.  These conditions which every company is required to fulfil are as follows-

  1. The article of association of company authorizes the issue of preference shares.
  2. The issuing of the preference shares by the concerned company has to be authorised by passing a resolution at a general meeting of the company.
  3. The concerned company while in the time of issuing preference shares should not have defaulted in the redemption of the preference shares being issued either before or after the commencement or in payment of dividend due on the preference shares.

Various kinds of preference shares that can be issued by the company are as follows-

  1. Redeemable Preference Shares- All the preference shares issued by the company are the redeemable preference shares. Thus every company except the infrastructure company is required to redeem these shares within 20 years from the date of issue.
  2. Irredeemable Preference Shares-The irredeemable preference shares are those shares which would not be redeemed by a company. However, the Companies in India are not allowed to issue irredeemable preference shares.
  3. Cumulative preference share- The holders of cumulative preference shareholders are entitled to obtain the dividend in the years in which they incurred profits for the year in which they were unable to receive dividend due to insufficient profits.
  4. Non-Cumulative Preference Shares- The non- cumulative preference shares are just the reverse of cumulative preference shares. The shareholders of non-cumulative shares are not entitled to receive the dividend for a year where the dividends could not be paid in the subsequent years. Thus, in case of the non-cumulative preference share, the rights to the dividend for a year cannot be carried over in the following year.
  5. Participating Preference Shares- The participating shareholders are holders that are entitled to receive some surplus profit or dividends in the company, in addition to being entitled to some fixed dividends as well.
  6. Non-participating Preference Shares- The non-participating shareholders are eligible to to get the fixed amount of dividend only and they are not supposed to participate in the surplus profits of the company.
  7. Convertible Preference Shares –Preference shares that can be converted into equity shares are known as convertible preference shares. The terms and conditions for such issue id=s distinctly stated at the time of issue of such shares.
  8. Non-convertible Preference Shares-The non-convertible preference shares are not convertible into equity shares of the company, but they retain their preferential value to the payment of capital when in case of winding up of the concerned company.
New Exemptions Granted to Private Limited Companies

Companies Act 2013 which replaced the earlier Companies Act 1956 levied certain Restrictions on the Private Limited Company. Due to which the owners of private limited company raised concerns. Keeping in mind the interest of the private limited company an exemption list provided to the private limited company was released on 5th June 2015. Following exemptions were granted to the private limited company through the notification of 5th June 2015-

  1. Related Party Transactions- With the implementation of companies Act 2013 undertaking the related party transactions required the board approval and in some case, the approval of shareholders is required.

The amendment introduced modified the definition of a 'related party' for private limited companies. Due to which the following were excluded from the definition of related party-

 (a) Holding companies

 (b) Subsidiary companies

 (c) Associate companies

 (d) Subsidiaries of holding companies of the private limited company.

 Thus, transactions of a private company with Exempted Entities will not be considered to be a "related party transaction" and will not require compliance with the provisions of Section 188 of the 2013 Act. Further, the related parties were not permitted to vote at a general meeting of shareholders for a resolution to approve any contract or arrangement between the company and a related party. Through the Exemption Notification, this restriction will also be removed from the private limited company.

  1. Kinds of Share Capital- Companies Act 2013 put forward the restriction on the private limited company that it can issue only two kinds shares i.e equity shares and preference shares. This restriction was removed through the exemption list issued. Thus now private limited companies are free to issue any type of share they desire without any restriction but subject to their charter. This helped the private limited companies to issue any class of shares.
  2. Accepting deposits from members- The companies Act 2013 permits all kinds of companies to accept deposits from their members subject to the fulfillment of certain conditions. After the exemption list was released these restrictions do not apply to the private limited companies accepting deposits from members which are less than 100% of its paid- up share capital and free reserves. However, the private companies are required to file the details of such deposits received from the members with the registrar of companies in the prescribed manner.
  3. Power to purchase own shares- Earlier no private limited company and the public limited company was empowered to purchase its own shares. However now the private limited companies who satisfies the following conditions are empowered to purchase its own shares-
  • No other body corporate has invested any money in share capital of the Company
  • Borrowing from banks, Financial Institutions or Body corporate is less than twice of its paid up capital or ₹ 50 crore, whichever is lower
  • Such a private company should not have defaulted in repayment of borrowings as may be existing on the date of the transaction under the section.
  1. Loan to directors- As per the provision of section 185 of the companies act 2013 no company can advance loan to its directors or any person in which director is interested. Further, it prohibits giving any kind of guarantee or providing any security in connection with any loan that the directors avail in their personal capacity. Now an exemption is being granted to the private limited companies for granting loans if they satisfy the following conditions-
  • There shall be no other body corporate shareholder in the lending company
  • If the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower
  • Such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this Section.
  1. Resolutions and agreements- As per the Companies Act 2013 the private limited companies were required to file the all kinds of resolutions passed and the agreements made with the registrar of companies. However, after the exemption list was released they are no more required to submit the resolution and agreements with the ROC.
  2. Auditors’ Eligibility- The restriction was imposed by section 141 of companies Act 2013 to the auditing firms, partner or the partnership firms. The auditor who is in full time employment elsewhere or in the capacity as auditor of more than 20 companies at the date of appointment or reappointment shall not eligible to be appointed as auditor of the company.

The exemption notification has modified this restriction. Now the appointment of a person as an auditor of one person companies, dormant companies, small companies; and private limited companies having a paid up share capital of less than Rs. 100 Crore may appoint its Auditor irrespective of the limit of 20 audits provided earlier.

  1. Participation of interested directors- Under the Companies Act 2013 the director is required to disclose his interest in the company with whom a contract and arrangement is entered if he is directly or indirectly is in association with that company. Further, he was not allowed to participate in a meeting of the board where discussion of this contract or arrangement is held. This restriction made it difficult to many private companies to comply with companies act provision, particularly in companies having two directors and either one or both of them are interested. Thus through the exemption list, the interested directors were allowed to participate in the meeting where such contracts or agreements are discussed.
  2. Appointment of senior personnel- As per the sections of companies Act any appointment of the Senior Management by the board of directors shall be subject to the approval of shareholders at a general meeting. The companies appointing Senior Management are also required to comply with the prescribed terms and conditions. In case of failure to comply with the terms and conditions specified in Schedule V, the approval of the central government is required to be obtained by the relevant company.

Further, if the shareholders at a general meeting do not approve the appointment of the Senior Management by the board of directors, such disapproval shall not result in the actions of the Senior Management prior to the general meeting becoming invalid.

Through the exemption list, this restriction is not applicable to the private limited companies.

  1. Minimum Capital Requirement- Earlier in order to incorporate the private limited company, it was mandatory for every private limited company to have a minimum paid-up share capital of rupees 1 Lakhs. Through the exemption list, the requirement of minimum share capital has been removed.
NRI shareholders incorporating in a Private Limited Company in India

Non Resident Indian abbreviated as NRI are the people with Indian origin but live in Foreign Countries. They have their and professional and personal relation with people living in India. Let’s make it more clear by making things classified as two types of Non Resident Indian    

  • Person do not live in India but have an Indian passport
  • Non-resident Indians holding foreign passport but Person of Indian Origin (PIO)

Private Limited Company is a popular mode for the NRI or Foreign Investors to start on with business in India., This classification is done by FEMA Act, 1999.

 Are NRI's allowed to establish any Company type they want in India?

Private Limited Company and other Limited Company is the only type of company that can be incorporated by NRI and Foreigners. Any NRI or Foreigner is not allowed to form One Person Company, Sole proprietorship or Partnership type of business unless its limited Company.

Registration of Business Type

Foreign Direct Investment (FDI) is allowed in Private Limited Company in India under Automatic route. It can be possible in Limited liability Partnership but there is a need of prior approval from the Reserve Bank of India for the same.


According to the Companies Act, 2013 NRI or foreigners can be Directors and Shareholders of the Private Limited Company. As you know private limited company need minimum of two shareholders and can have a maximum of 200 shareholders. As per certain FDI norms in India NRIs are subjected to the process of shareholding making things simpler as the Reserve Bank of India allows 100% FDI in many sectors in India under the automatic route.

Procedure of Incorporation

There is no difference in the process of registration of the Company for the NRIs as compare to the Indian Directors and Shareholders. There is a need of at least one Director and one shareholder of Indian Origin. The documents are same as of the Indian Shareholders, but all must be notarized. The ID-proof, Address Proof and other documents of foreign documents need to be Notarized by a licensed professional.

Purchase & Transfer of Shares by NRIs in a Private Limited Company

There are several conditions on which the purchase of the shares of NRI depends, a person staying out of India can purchase share/equity/stock/preference shares/convertible debentures that are offered by an Indian Company based on the following conditions:

  • It is permitted under FDI Scheme should not increase with the purchase of shares by the NRI or the percentage of the Foreign Equity which is already approved.
  • Sectored cap of FDI for the share should not be exceeded.
  • Stock Purchase should be by a person who is already staying out of India
  • Indian shareholders should not amount of share more than NRI or Foreigner.

Transfer of shares depends on who is transferring the share to whom. It can be the following situations

NRI to another NRI

The Reserve Bank of India has given permission to carry forward this transfer of shares of a Company from one NRI to another NRI/PIO.

NRI to Person Resident in India

This needs prior permission from the Reserve Bank of India as the shares are being transferred to person resident outside India to a person resident in India.

 NRI to Indian Resident

The transfer of share by NRI to an Indian Resident is permissible by the Reserve Bank of India, and can be done by way of gift to a resident of India.

Foreigners as Shareholders in Private Limited Company

Foreign Direct Investment (FDI)

Foreign direct investment (FDI) is the controlling ownership in a business enterprise in one country by a share based in another country. FDI is either in the form of business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company.

Private Equity Capital

Value which implies shares issued by an organization and Private Equity is the load of capital that is not insinuated on an open trade rather it is the immediate interest in the venture. The private value capital originates from the retail and organization financial specialists.

Since India has constantly kept up the budgetary development and the decent variety in India pulls in outside nationals to put resources into the Indian Market. There are certain facilities for Private Limited Companies as Foreign Direct investment upto 100% into this sector is under automatic route and there is no need for the approval of Government. Therefore,Private Limited Company Incorporation is the best form of company recommended for foreign nationals Since, its quickest and easiest way to enter into Indian Market.

There are certain restrictions on Foreign Direct Investment in Private Limited Company that needs government approval. 

Petroleum sector, Natural gas/LNG pipelines (this excludes private sector oil refining)

Investing in Companies infrastructure.

Defence and strategic industries, Broadcasting, Print Media, Tea Sector

Asset Reconstruction Companies, Courier Services, Postal Services, Atomic Minerals

There are certain steps associated with the incorporation of an Indian Private Limited Company for foreign nationals.

Company need to have a minimum of two shareholders and two directors and the shareholder can be a person or a corporate entity but the director needs to be a person.

A foreign national is permitted to be the director of the company. Among the directors, it is must to have at least one director of Indian origin i.e. both citizen and resident of India.

There can be a combination of Foreign Nationals or Foreign Companies holding 100% shares of the Indian Company. Hence one corporate entity cannot hold all the shares of the Indian Private Limited Company.

DSC for Foreign National Directors

This is a very important and fundamental application form in the process of Registration, hence it is needed for all the directors associated with the Company.

Documents to be attached for Foreign Nationals are:

  • Copy of Passport is mandatory as an ID Proof.
  • Address Proof :It should not be older than one year from the date of filing the form.
  • Rest of the documents are all same as for the Indian National.

For a foreign national all the documents are to be notarized.

For the foreigners residing in India, the documents required are:

  • Passport
  • Visa
  • Application form
  • Passport photograph

Resident Permit: All the above documents from the single embassy

DIN and Name Approval

 Director Identification Number (DIN) should be obtained for the directors of the Company. As per the Companies Act, 2013, Once the DSC (Digital Signature Certificate) is obtained it is easy to get the DIN for the Directors.

There must be a minimum of two DIN numbers

Filing for Incorporation of a Private Limited Company

Another important step is name approval and once it is done documents can be filed with the Ministry of Corporate Affairs (MCA) for Company Incorporation.

Following documents are required:

  • Affidavits & declaration from the Directors.
  • Memorandum of Association and Article of association
  • Address Proof of Registered Office.

Finally, the company will receive the incorporation certificate after noticing all the documents have been notarized by both the Indian and Foreign Directors. An Indian Company can finally apply for the Company PAN Card and also open a Bank Account in India.

Checklist for Due Diligence of Company

Due diligence is a formality performed before bank loan funding, business sale, private equity investment, etc., It is the process to check, the financial, legal and compliance aspects of the company that are usually reviewed and documented. This procedure can be followed in any type of company whether it Private Limited Company or any other Limited Company. Companies should be updated with the checklist by performing due diligence on a company in India.

Due diligence mainly helps the buyer take an informed investment decision and mitigate risks associated with a business purchase transaction. In the procedure both the parties usually enter into a non-disclosure agreement prior to starting a business due diligence as sensitive financial, operational, legal and regulatory information would be divulged to the buyer during the due diligence process. It is the responsibility of the seller of the business or shares or “Seller” to provide the documents and information necessary for performing a due diligence on the company to the buyer. Business due diligence is process performed prior to the purchase of a company or investment in a company by the acquirer or investor or we can say buyer.

Documents Required During Company Due Diligence

  • Certificate of Incorporation
  • Memorandum of Association
  • Articles of Association
  • Shareholding Pattern
  • Financial Statements
  • Income Tax Returns
  • Bank Statements
  • Tax Registration Certificates
  • Tax Payment Receipts
  • Property Documents
  • Statutory Registers
  • Intellectual Property Registration or Application Documents
  • Employee Records
  • Utility Bills
  • Operational Records

Review of MCA Documents

Mainly due diligence of a company starts with the MCA (Ministry of Corporate Affairs) website. The master data about a company is made publicly available. Further, with the payment of a small fee, all documents filed with the Registrar of Companies is made available to anyone. The relevant information from the MCA website is usually verified first. The documents and information gathered in this step include:

  • Company Information
  • Date of Incorporation
  • Authorised Capital
  • Paid up Capital
  • Date of Last Balance Sheet
  • Date of Last Annual General Meeting
  • Status of the Company
  • Director Information
  • Date of Appointment of Directors
  • Directors of the Company
  • Charges Registered
  • Details of Secured Lenders of the Company
  • Quantum of Secured Loans
  • Documents
    • Certificate of Incorporation
    • Memorandum of Association
    • Articles of Association

In addition to the above, the financial information of the company and other filings with the MCA pertaining to various aspects of the company can be downloaded and reviewed. The review of MCA documents of the company would provide a good overview of the company to the person performing the due diligence.

Review of Articles of Association

It is very important to review the articles of association of a company during the due diligence process to ascertain the different classes of equity shares and their voting rights. The articles of association of a company can restrict the transfer of shares of a company. Thus, the articles of association should be studied carefully to ascertain the procedure for transfer of shares.

Review of Statutory Registers of Company

Under Companies Act, 2013, a private limited company is required to maintain various statutory registers pertaining to share allotment, share transfer, board meetings, board of directors, etc., Therefore, the statutory registers of a company must be reviewed to obtain and validate information pertaining to directorship and shareholding.

Review of Taxation Aspects

Taxation aspects of a company must be thoroughly checked during the due diligence process to ensure that there are no unforeseen tax liabilities created on the company in a future date. The following aspects relating to the taxation aspect of a company must be checked:

  • Income tax return filed
  • Income tax paid
  • Calculation of income tax liability by the company
  • ESI / PF Returns Filed
  • ESI / PF Payments
  • ESI / PF Payment Calculation
  • Service Tax / VAT Returns Filed
  • Service Tax / VAT Payments
  • Basis for Service Tax / VAT Payment Calculation
  • TDS Calculations
  • TDS Returns
  • TDS Payments

Review of Book of Accounts and Financial Statements

 Companies need to maintain book of accounts along with detailed transaction information by the Companies Act, 2013. Hence, detailed financial transaction information must be audited and verified against the financial statements prepared by the company. Some of the matters relevant during the business financial due diligence process are:

  • Verification of cash flow information
  • Verification and valuation of all assets and liabilities
  • Verification of bank statements
  • Verification of all financial statements against transactional information

 Review of Legal Aspects

A comprehensive legal audit of the company must be performed by a legal practitioner to ascertain if there are any pending legal actions, suits by or against the company and liability in each. Further, the following aspects must be checked during the legal due diligence:

  • Legal due diligence for all real estate properties of the company.
  • Verification of court documents and court filings, if any.
  • No objection from Secured Creditor for transfer of company.

Review of Operational Aspects

It is important to obtain a through understanding of the business model, business operations and operational information during the due diligence process. The review of operational aspects must be extensive including site visits and employee interviews. Following are aspects that must be covered and documented in the operational aspects review:

  • Number of Customers
  • Number of Employees
  • Business Model
  • Production Information
  • Machinery Information
  • Vendor Information
  • Utilities

In addition to the above, based on the business and business model, other operational aspects may be important. Those aspects must be thoroughly checked and documented during the due diligence process.

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