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Private Limited Company & Yearly compliance challenges for startups

, June 29, 2016, 0 Comments

decoding-private-limited-company-llp-marketexpress-inKrrishan Gopal Singhania is a practicing corporate lawyer with over 20 years of experience in the field of arbitration. He runs his own law firm, Singhania & Co. Krrishan has extensive exposure to the international legal arena, he has been instrumental in securing IPRs such as Trademark, Patent and Copyrights, for foreign companies.

Ezilarsan PKP: Is the yearly compliance procedure for Private Limited Company overwhelming for startup?

Krrishan Singhania: After commencement of Companies Act, 2013 from 1st April 2014, the compliance requirement for Companies was made more stringent. It was discouraging for the existing Private Companies to cope up with a whole new bunch of compliances and it was underwhelming for entrepreneurs to start a new company. The new Company law was a pain, especially for the budding entrepreneurs, the young generation. Although it allows a single-person company to be set up, when it needs to draw in fresh investment, it will be forced, for all practical purposes, to become a multi-share-holder Company. However small it is, it will have to meet full Secretarial Standards.

The Government has reviewed the pain points of the businesses and accordingly has tried to bring about a restorative mechanism for easing out the compliance procedure for Private Limited companies. So, recently some “EXEMPTIONS” have been provided to Private Limited Companies. The Ministry of Corporate Affairs, Government of India has relaxed few compliance procedures for Private Companies and has “Removed Hurdles in the path of Startups”. Additionally, various new measures have been introduced in order to facilitate doing business in India. By virtue of these initiatives, Private Limited Companies for startups and any business are back in fashion. Time and again, the Government have acknowledged the hardships faced by stakeholders due to complex compliance procedures required to be followed by private companies and are coming up with ways to exempt or relax the compliance procedure. So there is still a lot of scope for relaxing and further easing the compliance procedures for Private Companies.

Some of the major exemptions have been outlined as under: 

  • Incorporation by Single Form INC-29: This is part of the government’s drive to improve India’s ranking on the globally tracked parameter of ease of doing business. Entrepreneurs keen on setting up new enterprises will be able to incorporate one by filing just one form against eight separate forms earlier, as part of the government’s drive to make it easier to do business in the country. This initiative was brought in to incorporate companies in a couple of days. In reality, this takes around five days. Nevertheless, this indeed is a huge improvement over the existing timeline of 15 to 20 days. So a startup can now form a Private Limited company in less number of days.
  • “Name availability, allotment of Director Identification Number (DIN), company incorporation and commencement of business will now be possible through a single form.
  • No need of Minimum Capital Requirement. There is no minimum capital requirement and hence no burden of putting in such a large amount, as previously required, in the company bank account. This amount can be introduced as per the convenience of the business owners.
  • Private Companies have been allowed to accept deposits from members without the requirement of offer circular and creation of a deposit repayment reserve, etc, maximum of 100% of the aggregate of its paid up capital and free reserves (which does not include securities premium).
  • Major exemption has been given from filing of board resolutions with the ROC in Form MGT-14 for the purposes mentioned under Section 179(3) of the Act.
  • OPCs, dormant companies, small companies and private companies having paid up share capital less than Rs. 100 crore have been excluded in calculating the limit of 20 companies for audit by an auditor.
  • No need to pass “Special Resolution” for the purposes of passing of Resolution mentioned under Section 180. Example: 1. Borrow exceeding paid up capital & free reserves.
  • An interested director of a private company can now participate in the Board meeting after declaring his interest. But will not count for the quorum.
  • Loan to Director u/s 185 of the Act allowed subject to certain conditions.
  • The exemptions relax the provisions for entering into Related Party Transaction.
  • Exemption from filing of INC-21 – Newly formed company could not commence operations until it has filed with the ROC a declaration in form INC-21 that the paid-up capital has been subscribed by the signatories to the Memorandum. Hence technically, startups had only one option i.e. to deposit Rs 100,000 as soon as the company gets incorporated. This requirement has been done away with. Hence, there is no undue pressure on startups to subscribe to the shares immediately on incorporation. Startups can now quickly start their operations.
  • Articles of Association may contain over-riding provisions to Companies Act pertaining to content and length of notice, explanatory statement, quorum, chairman, proxies, restriction on voting right, show of hands and poll (subject to certain conditions).
  • There is no need to have separate voting on the resolution for the appointment of more than 1 director. In other words, a simple vote could also decide the appointment of two or more directors through a single resolution. This implies less paperwork.
  • The minimum time limit for Rights Issue, which was earlier 15 days, has been relaxed. The Minimum offer period can be reduced, if 90% members give their consent in writing or electronic mode.
  • ESOPs can be given by Ordinary Resolution instead of Special Resolution.
Disclaimer: All information provided herein is of a general nature and for informatory purposes only. It does not constitute legal advice regarding any specific or general matter or issue. Those obtaining information from this article/write-up should not act on it without first consulting a professional on the law applicable to a particular set of facts. In no event we will be liable for any direct or indirect damages resulting from an individual’s or entity’s use of information from this article.

Mr. Nirav Punjani, Associate Advocate and Ms.Aashi Sirohiwala, Intern at Singhania & Co has also contributed towards the presentation.