Incorporation of Companies; Statutory Compliances

Forms

There are various models for establishing business presence in India. Some of the popular
forms are Sole proprietorship, partnership, limited liability partnership and company.

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A sole proprietorship is a one-man organisation where a single individual owns, manages and controls the business. There is no specific legislation in respect of such business entities and registration is not required. The Indian Partnership Act, 1932 lays down the law relating to partnerships in India. Each partner is liable for the act/omission of the other and liability is unlimited. Registration is not mandatory under the said Act. Choosing a suitable business model prima facie depends upon the nature of business, the risk appetite of the owner, exercise of power and control in operations, division of profits and losses. Each business model has its own pros and cons.
LLPs
Limited liability partnerships (LLPs), where the liability of the partners is limited to their agreed contribution and a partner is not liable on account of the independent or un-authorized actions/misconduct of other partners, are governed by the provisions of the Limited Liability Partnership Act, 2008. The liabilities of the LLP and partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose are unlimited for all or any of the debts or other liabilities of the LLP.
Companies
The Companies Act, 2013 (‘Act’) received the assent of the President on August 29, 2013. The Act contains 470 Sections and 7 Schedules. Various sets of Rules have been notified to implement and operationalise the provisions of the Act.

The Act contains provisions for establishing and running of companies. The Regional Directors (RDs) appointed under the said Act are in-charge of the respective regions, each region comprising a number of States and Union Territories. They supervise the working of the offices of the Registrars of Companies (ROC) and the Official Liquidators working in their regions. They also maintain liaison with the respective State Governments and the Central Government in matters relating to the administration of the Act. Certain powers of the Central Government under the Act have been delegated to the RDs. The Registrars of Companies and RDs are vested with the primary duty of registering companies and ensuring compliance with the provisions of the said Act.
Incorporating a company (‘Public Limited’ and ‘Private Limited’ being the two major types) entails several formalities though procedure for incorporation of a public limited and private limited company is almost the same whereas a partnership can be formed by signing a simple partnership deed. Basically, the following steps are involved in incorporating a company:
Applying for Director Identification Number (DIN) and creating digital signature for each director;

Applying to the Registrar of Companies (ROC) for a company name;

Drafting of Memorandum of Association and Articles of Association and their stamping;

Filing of the Memorandum of Association and Articles of Association with the ROC;

Payment of registration and filing fee;

Scrutiny of documents by the ROC;
Issuance of certificate of incorporation.
There are several distinctions between public limited companies and private limited companies such as minimum number of subscribers, initial public offering etc. After incorporation of a company, certain general/annual requirements prescribed by the Act are to be complied with. Some of the statutory formalities required to be complied are:
Annual General Meeting (AGM) - a company ought to hold an AGM at its registered office/ in city/town of its registered office/ such other place as the Central Government may approve not more than 15 months from the date of commencement of the last AGM. Provided that the AGM should be held within a period of six months from the date of closing of the financial year. At every sixth AGM, company must appoint auditor/s who shall have a right of access to the books of account and vouchers of the company at all times. Any general meeting held between two AGMs is called an Extraordinary General Meeting (EGM).

Meetings of the Board of Directors - a meeting of the Board of Directors of the company must be held at least four times in a year and there shall not be more than 120 days gap between two consecutive board meetings. These meetings can be held anywhere. The participation of directors in a meeting of the Board may be either in person or through video conferencing or other audio visual means. However, certain matters such as approval of the annual financial statements cannot ordinarily be accomplished in a meeting through video conferencing or other audio visual means.

Filing of Financial Statements, Auditing and Return – The Board of Directors is required to lay the financial statements for the financial year as well as a separate statement containing salient features of financial statements of subsidiary/ies of the company at every AGM. Companies are required to file a copy of the financial statements with the office of the concerned Registrar of Companies within 30 days from their AGM or where the AGM is not held, then within 30 days of the last date before which the AGM was required to be held along with statements of facts and reasons for not holding the AGM. Every company should file within sixty (60) days of the AGM, a return containing certain particulars in respect of the company.

Records – a company is required to maintain proper books of account on accrual basis and according to double entry system. The books are required to give a true and fair view of the state of affairs of the company and explain transactions effected at both registered office and its branches. The books of account relating to eight years immediately preceding the current year together with supporting vouchers are required to be preserved in good order.

Event Based - Allotment of shares; transfer of shares; appointment/resignation of directors; appointment of Managing Director/Whole Time Director; change in the statutory auditors; change in registered address; changes in any of the registered particulars etc. are required to be reported to the ROC.

Filing of Tax Returns – a company has to file its annual corporate tax returns. Additionally, a company is required to file its GST returns annually, as well as monthly and/or quarterly depending on its turnover.

A company may choose to wind up voluntarily. However, a company may be wound up by the National Company Law Tribunal if, inter alia, the Tribunal is of the opinion that it is just and equitable that the company should be wound up and/or if the company has not filed its financials or annual return with the ROC for preceding five (5) consecutive years.

Other salient features of the Act are as follows:
 
Enhanced communications
- Every company must have a registered office which is capable of receiving and acknowledging all communications and notices.
-Every company must paint or affix its name and address of its registered office on the outside of every office or place in which it carries on its business in a conspicuous position and legible letters. In certain cases, it may be required to state this information in local language as well.
-The name of the company must be engraved in legible characters on its seal, if any.
-The name of the company, address of its registered office along with corporate identity number (CIN), telephone, fax, email and website have to be printed in all its business letters, billheads, letter papers, notices and other official publications.
-The name of the company must be printed on hundies, promissory notes, bills of exchange and other documents as may be prescribed.
- If the company changed its name/names within the last two years, then it shall paint or affix or print the former and latter names.

General
-Independent Director has been defined.
-Small Company has been defined and enjoys limited exemptions.
- Possibility of a company (inactive company/company formed for a future project or to hold an asset or intellectual property and has no significant accounting transaction) to obtain the status of a Dormant Company.
-Every company to have at least one director who stays in India for a total period of 182 days or more during the financial year.
-Restriction on the number of persons who can associate or enter into a partnership for carrying on business changed from 10/20 to as may be prescribed not exceeding 100. In certain cases, restriction removed totally.
-A person is allowed to hold directorship (including alternate directorship) in 20 companies at the same time out of which not more than 10 can be public companies.
 
One Person Company
-A company may be formed by one person and avail of limited exemptions such as exemption from preparing cash flow statement as a part of its financials or holding an annual general meeting.
-Another person to be nominated to become member in case of death/incapacity of the subscriber.
-The words “One Person Company” shall be mentioned in brackets below the name of such company wherever its name is printed, affixed or engraved.

Accounting
-Consolidated financial statements mandatory for all companies that have one or more subsidiaries.
-Financial Year (FY) prescribed from April 1 to March 31 of the following year.
-Re-opening of books of accounts in certain circumstances.
-Revision of financial statements and reports by Directors in respect of any three preceding financial years upon approval by the National Company Law Tribunal.
-Appointment of internal auditor must in certain cases.

Auditing
-Auditor to be appointed for a period of 5 years. Restrictions on reappointment have been prescribed.
-A retiring auditor may be re-appointed at an annual general meeting, if he is not disqualified for re-appointment.
-Constitution of National Financial Reporting Authority to make recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption, monitor and enforce compliance therewith and oversee the quality of service of professions associated with ensuring compliance with such standards and suggest measures for improvement.

Company not to make investment through more than 2 layers of investment companies
- A holding company can advance loan or give guarantee or security in respect of loan made by any bank or financial institution to its wholly owned subsidiary company.
-Only a registered valuer can carry out valuation in respect of any property, stocks, shares, debentures, securities, goodwill or any other assets or net worth of a company or its liabilities required under any provision of the Act.
-There are provisions related to the buy-out of minority shareholding.
-Amalgamation/merger of an Indian company with a foreign company possible.
-Special provisions for merger or amalgamation between small companies or between a holding company and its wholly owned subsidiary.

Directors and Management
-One woman director mandatory in certain companies.
-Schedule IV prescribes a code for independent directors.
-Disclosure of shareholding interest (not less than 2% of the paid up share capital in another company) of every promoter, director, manager and key managerial personnel (KMP) in Notice for General Meeting where business pertaining to the other company is to be transacted.

Corporate Social Responsibility (CSR)
-Every company having a net worth of INR 500 crores or more or a turnover of INR 1000 crores or more, or a net profit of INR 5 crores or more, during the immediately preceding financial year shall constitute the Corporate Social Responsibility committee.
-Schedule VII prescribes activities which may be included in the CSR policies.

Investor Protection
-Related party transactions under greater scrutiny. Non-compliance attracts penal provisions.
-Class action suits possible against prejudicial management or conduct of affairs against the interests of the company or its members or depositors.
- Establishment of an ‘Investor Education and Protection Fund’ which can be used for various specified purposes such as refund in respect of unclaimed dividends, mature deposits, mature debentures.