Important Deadline — Form filing for loans and deposits — June 30

If your company has taken loans or deposits, this form filing requirement applies to you!

Every company having outstanding money/loan received shareholders or directors or any other person has to file Form DPT-3 by June 30, 2019 with respect to deposits/exempted deposits accepted by the Company and the amount of loan/money outstanding as on March 31, 2019.

In case, no amount/loan has been received by the Company which can be considered a deposit or exempted deposit, the filing of form DPT-3 with ROC is not applicable.

Also, in case there are deposits accepted by the Company, you also require a certificate from the statutory auditor certifying the details of the same.

In case of default in filing of form, the Company shall be liable to pay a penalty of Rs. 5,000 and Rs. 500 per day in case of a continuing default. If the Company is non-compliant then it shall be chargeable with fine of Rs. 1 Crore to Rs. 10 Crore. Every officer who is in default shall be chargeable with fine of Rs. 25,000 to Rs. 2 Crore and imprisonment up to 7 years.

LexGyaan Series on ESOPs – Part 1: How do Employee Stock Options Plan (ESOPs) work?

CREATING AN ESOP POLICY

In our experience of having assisted several entrepreneurs with execution of ESOPs for their startups, we have observed that most entrepreneurs are under the impression that by just mentioning the number of ESOPs on their cap table, or in offer letters to their employees, the startup has fulfilled its obligation to grant ESOPs to its employees. This is actually incorrect.

Mentioning ESOP pool on your cap table actually just makes your investors happy. Why? Well when an investor invests in your startup, they want to ensure that they do not get diluted for any reason except in case of future rounds of fundraising by your startup (even for that they have the right to maintain valuation aka pre-emptive right). It is important for investors that their shareholding does not get diluted in order to give shares to your employees, mentors or all those well-wishers of yours, whose help and guidance you took in the initial days of starting up and promised equity to. Only you the founder should get diluted to give these promised equity shares to your mentors and advisors, not the investors. This is the reason why investors require a startup to create an ESOP pool/advisory stock option pool, as a condition precedent to their investment in a startup. This is also the reason why investors require you to convert all loans from friends and family, and conversion of convertible notes, if any.

Related reading: Understand how valuations work and how a founder’s shareholding gets diluted when an investor invests in a startup in our blog titled ” The Valuation Game.. What Does It Mean Exactly? , by our co-founder, Karthik Chandrasekar.  

Therefore, all you have achieved by mentioning a “ESOP Pool” on your cap table and inserting a number against it is (a) carving out the maximum number / percentage up to which your investors won’t get diluted, and (b) demonstrating to your investors, your intention to give ESOPs some day to your employees.

At this stage, where your startup’s ESOPs are only on the cap table, your ESOPs are only a virtual pool. How do you convert the ESOPs in to reality? Well, that’s easy, you will just have to create an actual ESOP pool. In order to do that, you will have to take the following steps:

Step 1

Draft an ESOP Policy in compliance with the Indian Companies Act, 2013. The ESOP Policy will have to set out in detail the terms of ESOPs, cliff period, vesting schedule, exercise price/strike price, exercise period, consequences of employee leaving the startup, consequences of the startup getting acquired, etc.

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Step 2

Once the draft ESOP policy has been finalized and if you have investors in your startup, then check your Shareholders’ Agreement and Articles of Association, to verify if the approval of investors for a ESOP policy will be required. Lost? Well, just look for a clause that is titled either as “reserved matter right” or “affirmative voting matter” or  “affirmative voting right” or “investor protection matter”. Once you find this clause, then look through the several items and check if creating a stock option, ESOP etc is listed therein. If it is, then you would have to send an email to your investor alongwith copy of the ESOP policy for your startup, requesting the investor for its approval to the ESOP policy.

LexGyaan: Most VCs get their respective legal team to also review the ESOP policy. Therefore, be prepared for few iterations and discussions.

 Step 3

Where you don’t have any investors in your startup, you can skip step 2 and directly proceed with step 3, i.e., convene a Board Meeting for approval of the ESOP Policy. How to convene a board meeting properly under Companies Act, 2013?

Step 4

Convene a meeting of Shareholders (aka EGM) of your startup, for approval of the ESOP Policy.

Now you have an ESOP policy and can formally start granting ESOPs. Click here to download a free template of a ESOP grant letter!

Click here to read FAQs on ESOPs.

LexStart makes ESOP creation a breeze. Click here to learn more. Request a Demo.

 

LexStart’s LexGyaan Series: Can I grant ESOPs to a Co-Founder?

Granting ESOPs to Promoters/Co-Founders

I often get asked this question – “Can I grant ESOPs to a Co-Founder who I recently brought on board my Startup?”. Well the answer is both yes and no!

The Companies Act, 2013 prohibits grant of ESOPs to the Promoter of a company. The term “Promoter” does not necessarily refer to only a person who is named as a Promoter at the time of incorporation of the company. A Promoter is defined broadly and includes, the following:

  • Any person who has been named as such in a prospectus or is identified by the company in its annual return; or
  • Any person who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
  • Any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act. Provided that such person is not someone who is acting merely in a professional capacity.

Therefore, typically a Co-Founder who you bring on board at a later stage, may not be a Promoter as stated in the Charter Documents (Memorandum and Articles of Association of your Startup) but still can be considered a “Promoter”, thus restricting him from receiving ESOPs in the company.

ESOPs to Promoters/Co-Founders of recognized Startups

The Companies Act, 2013 has made an exception to the above rule, by allowing Startups that are recognized by Govt. of India to grant ESOPs to founders, as long as the grant of such ESOPs is within 5 years from their incorporation. This means if your Startup has a Certificate of Recognition from DPIT, Govt. of India, then you can grant ESOPs to Promoters/Co-founders.

Related Readings : How to Get Startup India Registration

FAQs on ESOPs

 

Issue of Shares with Differential Voting Rights

What is Differential Voting Rights?

Shares with Differential Voting Rights (DVRs) means shares that give the holder differential rights as to voting (either more or less voting right) as against the Ordinary shareholders of the company.

Types of DVR    

  • Shares that have superior voting rights
  • Shares that have inferior voting rights

Eligibility/Condition for issue of shares with DVR*

  • AOA of the Company should authorize issue of DVR;
  • Consistent track record of distributable profits for the last three years;
  • No default in filing annual return for last 3 Financial Years;
  • No default in payment of declared dividend or repayment of deposit or loan borrowed;
  • the shares with differential rights shall not exceed twenty-six percent of the total post-issue paid up equity share capital;
  • No penalty by court or tribunal for any offense for the last 3 Financial Years; and
  • The shares issued with DVR cannot be changed later.

*This provisions shall not apply to private companies in case MOA and AOA of the company provide otherwise.

Procedure for issue of shares with differential voting rights

  • Check AOA of the Company;
  • Obtain valuation certificate from registered valuer;
  • Open a separate bank account;
  • The terms of issue of shares should be finalized;
  • Conduct board meeting for issue of shares with DVR;
  • In case issue of DVR affects the rights of existing class of shares then obtain consent from 3/4th of the shareholders of that class;
  • Filing form MGT-14 with ROC within 30 days of EGM;
  • Circulate offer letter along with the share application form to the investors;
  • Receive share application money along with the application form ;
  • Conduct board meeting for allotment of shares;
  • File form PAS-3 within 15 days of allotment of shares;
  • Pay stamp duty and issue share certificates; and
  • Make entry in register of members.

Difference between DVR shares and Ordinary Shares

DVR shares
  • Provide few or higher voting right to shareholders.
  • Rate of dividend is low or higher.
  • DVR shares are ideal for small shareholders or promoters.
  • Issued at a discount in comparison with ordinary shares.
Ordinary Shares
  • One share One Vote.
  • Rate of dividend is fixed for class of shareholders.
  • Ideal for large shareholders.
  • Issue at FMV.

Advantages of Issuing shares with DVR

From Issuer Perspective
  • To raise more capital without diluting its ownership structure.
  • Get control in decision making process.
  • A tool to avoid hostile take over.
  • To fund large Project.
From Investor Perspective
  • Benefit to investors since share are issued at discount & also for incremental dividend.
  • Better for investors who are looking for good quick return rather than voting rights.
  • Institutional Investors can invest in private companies without any limit and making it a subsidiary.

Dis-advantages of DVR

From companies Perspective
  • Lack of investor awareness about such issue of shares.
  • Issue shares at discount.
  • Minority shareholders can lose faith in the Company.
From investor Perspective
  • Lack of investor awareness about such issue of shares.
  • Possible misuse of voting power
  • by the promoters & hence act
  • against the interest of the shareholders.
  • Lack of liquidity may hamper return.
  • Not beneficial for Institutional
  • Investors as they are
  • interested in voting rights and long term capital gains both.

Case of Tata Motors

  • In 2008, issued DVR shares.
  • It was the first company in India to issue DVR shares and amongst the very few in Asia.
  • Issued at Rs 305 a share which was about 10% lower than the issue of normal rights at Rs.340.
  • Will offer 5% of more dividends.
  • Gives an additional 10.3% discount.
  • But carry one-tenth the voting rights of ordinary shares. This means 10 DVR shares = 1 ordinary share as far as voting rights is concerned.

Amazon caps voting rights in Witzig Advisory Services at 17%

  • Amazon has bought 17% stake in the company through Class A shares and the rest 32% through Class B shares having differential voting rights (DVR).
  • Each Class A share shall have one vote, while the Class B shares shall not carry any voting rights. This effectively caps Amazon’s voting rights in Witzig at 17%.
  • Amazon appears to have made use of DVR shares to comply with the new ecommerce FDI norms that came into force from February 1, and also to ensure that More can continue selling on its Indian marketplace.
  • The new ecommerce FDI guidelines had forced Amazon to reduce its stake from 49% to 24% in Cloudtail and Appario, the two top sellers on its marketplace. The American etailer had also evaluated the idea of limiting its holding in Witzig to less than 26%, and not acquiring 49% in the company as was originally planned.
  • By capping its voting rights in Witzig at less than 17%, Amazon will be able to continue with More as a seller. Samara Capital will hold 51% in Witzig, making the latter an Indian owned-and-controlled company.

Conclusion

  • For an investor, who wants to be in the company’s decision processes, DVR  shares is not an attractive proposition due to limited voting rights.
  • But if an investor isn’t concerned much with voting rights, then investing in the DVR would certainly be an attractive option.

Disclosure of Significant Beneficial Ownership

The Ministry of Corporate Affairs (MCA) on June 13, 2018 notified Section 90 of the Companies Act, 2013 (Act); and notified Companies (Significant Beneficial Owners) Rules 2013. This rule came into effect on June 14, 2018. These provisions require certain compliances to be followed by a Significant Beneficial Owner and a company.

Who is a “Significant Beneficial Owner”?

“Significant Beneficial Owner” means an individual who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds ultimate beneficial interest of not less than 10% in shares of a company or the right to exercise, or the actual exercising of significant influence or control in a company.

This applies to the (i) individual who is acting alone or together with one or more persons (includes partnerships) (ii) includes a trust (iii) person resident in India or outside India.

 Sr. No. Where Shareholder of a company is a Who is Significant Beneficial Owner?
A. Company Significant Beneficial Owner is the natural person, who, whether acting alone or together with other natural persons, or through one or more other persons or trust holds atleast 10% of share capital of the Company or exercise significant influence or control in the company.
B. Partnership Firm Significant Beneficial Owner is the natural person, who, whether acting alone or together with other natural persons, or through one or more other persons or trust holds atleast 10% of capital or is entitled of not less than 10% of profits of the partnership firm.
C. Trust The Significant Beneficial Owner shall be- the author of the trust, and the trustee and the beneficiaries with not less than 10% interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership.

Where no natural person is identified in point no. A and B in the table above, the Significant Beneficial Owner is the relevant natural person who holds the position of senior managing official.

What is the obligation of Significant Beneficial Owner?

  • Every existing Significant Beneficial Owner is obligated to file a declaration in Form No. BEN-1 with the respective company. This declaration is to be made by September 10, 2018.
  • Every Significant Beneficial Owner shall file any change in his significant beneficial ownership within 30 days to the company.
  • Every individual, who acquires significant beneficial ownership in a Company, shall file a declaration in Form No.BEN-1 to the Company within 30 days of acquiring such significant beneficial ownership.

What are the obligations of the Company?

  • The company receiving the declaration has to maintain a register of Significant Beneficial Owners.
  • The company has to file a return in Form No. BEN-2of significant beneficial owners of the company and changes therein with the Registrar within 30 days from the date of receipt of the declaration.
  • Maintain a register of significant beneficial owner in Form No. BEN – 3.
  • Also, if the Company knows or has reason to believe that someone is s Significant Beneficial Owner (or has been a Significant Beneficial Owner in last 3 years) and is not registered with the company as a Significant Beneficial Owner then, the company is required to give notice to such person seeking information in Form No.BEN-4.

Consequences of non-disclosure by Significant Beneficial Owner

  • Shares may be made subject to the restriction on transfer.
  • All rights in shares held by such Significant Beneficial Owner shall be suspended, including, voting rights, dividend etc.
  • The MCA may impose penalty of up to INR 1,00,000/- and INR 1,000 per day the default continues.
  • Such Significant Beneficial Owner can be charged with fraud under Section 447 of Companies Act, 2013.

Consequences of non-compliance by a company?

Fine ranging from INR 10,00,000/- to INR 50,00,000/- for company and INR 1,000 per day the default continues.

Who is exempted from definition of Significant Beneficial Owner?

  • Mutual Funds;
  • Alterative Investment Funds (AIFs); and
  • Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (lnvlTs).

Private Limited Company or Limited Liability Partnership. Which one to choose?

Many Entrepreneurs starting a new business are curious about the comparison between a Private Limited Company vs LLP. Both entities offer many similar features required to run a small to large sized business, while also differing starkly on certain aspects.

In this article, we will decode for you the comparison between Private Limited Company vs LLP from the viewpoint of an Entrepreneur starting a new business.

Registration Process

The Private limited company registration process and the LLP registration process are very similar with some differences in the documents and forms being filed for incorporation. The steps for incorporation of a Private Limited Company are:

  1. Obtaining Digital Signature Certificate (DSC) for the proposed Directors,
  2. Obtaining Director Identification Number (DIN) for the proposed Directors,
  3. Obtaining name approval from MCA and 4. Filing for incorporation.

LLP registration also has a similar process:

  1. Obtaining Digital Signature Certificate (DSC) for the proposed Partners,
  2. Obtaining Director Identification Number (DIN) / Designated Partner Identification Number (DPIN) for the proposed Partners,
  3. Obtaining name approval from MCA and 4. Filing for incorporation.

Both Private Limited Company and LLP are registered with the Ministry of Corporate Affairs and are issued a Certificate of Incorporation. The processing time for incorporation of a private limited company and LLP are also comparable with both entities taking on average about 20 days to incorporate.

Registration Cost

The Government fee for incorporation of an LLP is significantly cheaper when compared to the Government fee for incorporation of a Private Limited Company. LLPs have been introduced to meet the needs of small businesses and hence LLP enjoy lower government fee for incorporation. Also, the number of documents that have to be printed on Non-Judicial Stamp Paper and Notarized is lesser for LLP registration when compared to that of a Private Limited Company registration.

Features

Both LLP and Private Limited Company offer many of the same features. LLP and Private Limited Company are both separate legal entities and have assets and liabilities that are separate from that of the promoters. LLP and Private Limited Company are both transferable, though a Private Limited Company offers more flexibility when it comes to transferring or sharing of ownership. LLP and Private Limited Company both have perennial life, unless and otherwise closed by the promoters or a competent authority.

Ownership

Private Limited Company offers more flexibility for the promoters when it comes to ownership and ownership sharing. The ownership of a Private Limited Company is determined by its shareholding and a private limited company can have up to 200 shareholders. Further, since the shareholders do not directly participate in the management of the company, there is a clear distinction in a private limited company between the owners of share and the management. Hence, a private limited company is advantageous when it comes to ownership and management features.

In a LLP, there is not a clear distinction between the owners and management. In a LLP, the LLP Partners hold ownership of the LLP and also hold powers to manage the LLP. Therefore, a Partner in an LLP will be both an owner and a manager, whereas, in a Private Limited Company, the shareholders (owners) do not necessarily have to have management powers.

A private limited company is recommended for any business that is considering FDI or Employee Stock Options or Equity funding or Venture Capital funding.

Compliance

Tax compliances are similar for both private limited company and LLP. However, when it comes to compliance relating to the Ministry of Corporate Affairs, LLP enjoys significant advantages. An LLP does not have to have its accounts audited if the annual turnover of the LLP is less than Rs.40 lakhs and the capital contribution is less than Rs.25 lakhs. An LLP would, however, have to file LLP FORM 8 and LLP FORM 11.

A private limited company, on the other hand, would have to file annual return audited financial statements with the Ministry of Corporate Affairs each year.

Fines and Penalties

The penalty for non-compliance or late filing of documents with the Ministry of Corporate Affairs are most of the times higher for an LLP as a flat fee of Rs.100 per day is levied when the non-compliance continues with no cap on the liability. Therefore, LLPs could incur larger penalty or fines from MCA due to non-compliance. Therefore, it is important for the promoters of an LLP to be aware of the due dates and file the required documents with the registrar on time.

Other Factors

Private limited companies have been in existence for longer than LLPs and enjoy widespread recognition in India and the world. Therefore, there are well-established processes and procedures for Private Limited Companies. LLPs, on the other hand, is a recently introduced entity in India. Therefore, some of the rules, regulations, and procedures are continuing to evolve. LLPs are also not as recognized in India as a private limited company since it is a relatively new concept.

Private limited company offers its promoters a better image or standing than that of an LLP. Private limited company also enjoys better access to funding from banks and foreign direct investment.

Foreign Ownership

Foreigners are allowed to invest in an LLP only with prior approval of Reserve Bank of India and Foreign Investment Promotion Board (FIPB) approval, whereas in Private Limited Company Foreigners are allowed to invest in a Private Limited Company under the Automatic Approval route in most sectors.

Existence or Survivability

Existence of a Partnership business is dependent on the Partners. Could be up for dissolution due to death of a Partner.

In LLP, existence is not dependent on the Partners. Could be dissolved only voluntarily or by an Order of the Company Law Board, however in a Private Limited Company existence of a Private Limited Company is not dependent on the Directors or Shareholders. Could be dissolved only voluntarily or by Regulatory Authorities.

Registering the right type of company is crucial to the success of your business as it will help you avoid any complications later on. Every entrepreneur needs to closely consider his/her needs before even thinking of registering a company because every business is unique and the type of company you choose can go a long way in ensuring its success!

Contributed by: Vashvi Panwar

Directorship – Comply with MCA, KYC Guidelines

Ministry of Corporate Affairs (MCA), India would be conducting KYC (Know Your Customer) of Directors of all companies on an annual basis through a new e-form viz. DIR-3 KYC to be notified and deployed shortly with MCA.

Accordingly, every Director who has been allotted Director Identification Number (DIN) on or before March 31, 2018 and whose DIN is either (i) in ‘Approved’ status, or (ii) inactive due to disqualification of such Director would be mandatorily required to file form DIR-3 KYC on or before September 15, 2018 with MCA.

While filing the form, the Unique Personal Mobile Number and Personal Email ID of the Director would have to be mandatorily indicated and would be verified by One Time Password (OTP) to be sent to such Director’s registered mobile no.

The e-form should be filed by every Director using his own Digital Signature Certificate (DSC) with MCA and should be duly by a practicing professional (CA/CS/CMA).

Failure to comply with this provision will result in the DIN of such Director to be ‘Deactivated’ thus disqualifying such Director. Activation of DIN can then be done by paying requisite filing fees.

Decoding GDPR and Its impact in India

The General Data Protection Regulation (“GDPR”) was adopted by the European Union on 27th April 2016 and came into full effect on 25th May 2018, allowing for a transition time of a little over two years. In an increasing data-dependent world, the GDPR aims to protect individuals from the misuse of their personal data and breach of their privacy.

The GDPR has a universal impact, due to its extraterritorial scope and its precedential nature, for other countries to enact stronger data protection laws. Following is a brief overview of GDPR and the compliances it requires.  

Scope

The GDPR is applicable to all entities that process personal data of individuals in the European Union (and not only citizens of the European Union (EU)), for providing goods or services or for monitoring their behavior. Therefore, Indian businesses servicing the EU market will have to ensure GDPR compliance, if they collect or process personal data.

Personal Data

Personal data, under the GDPR, includes any information of an identified or identifiable natural person. The GDPR further provides for special categories of personal data, the compliances for processing of which are more stringent. Similar to Sensitive Personal Data and Information (SPDI) under the Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011 in India, the special categories of personal information under the GDPR include biometric data, health records, sexual orientation. However, GDPR extends the special categories of personal information to include data revealing a person’s ethnic or racial origins, political opinions, religious beliefs or trade union memberships.

Control and Processing

The GDPR identifies entities as “Controller” or “Processor”. A Controller is an entity that determines the purpose and means of processing personal data and has several accountability obligations. A Processor is an entity that processes i.e. collects, records, organizes, stores etc. personal data on behalf of the Controller. A Processor must process personal data only under a contract with the Controller and in accordance with documented instructions of the Controller.

It is important for businesses to identify the capacity in which they act and the nature of data they deal with to ensure full GDPR compliance.

Consent

The foundation of GDPR is consent of the data subject for processing personal data. Till now, online service providers had the practice of providing lengthy privacy policies, full of legal ease and practically incomprehensible for a lay person. GDPR requires that consent is sought from the data subject distinct, from any other terms and conditions, in an intelligible and easily accessible form, using clear and plain language. Separate and explicit consent must be sought for processing of special categories of personal data.

The data subject also has the right to withdraw her consent and the option to withdraw consent must be made as accessible as the option to provide consent.

GDPR Privacy Policy

On top of every GDPR compliance checklist for every business should be updating of website privacy policy.

Under the GDPR, the Controller is required to provide the data subject with relevant information relating to the collection and processing of data at the time of collection of such data. To do so the Controller should maintain a GDPR-compliant privacy policy. The privacy policy should be concise, transparent and easy to understand.

The privacy policy should include details of the Controller, the purpose of processing the data, the period for which data will be stored or the criteria for determining such period and the recipients of the data. The privacy policy should also inform the data subject of her rights under the GDPR, such as the right to request for access, rectification and erasure of data, right to withdraw consent, right to object to processing and right to data portability.

If the Controller undertakes further processing of the personal data, a fresh disclosure is to be made prior to such processing.

Security Measures

The Controller must maintain a record of the processing activities it or the Processor, acting on its behalf, undertakes. The records should include details of the controller, processor, purpose of processing, categories of data subjects and personal data.

The GDPR lays down several technical and organizational measures to be implemented to ensure the security of personal data, including pseudonymization and encrypting data, backup protection, ability to ensure the integrity of processing systems, regular testing, and audit of the safety mechanisms.  

The GDPR also lays down a “code of conduct” to be adhered to by Controllers and Processors. In addition, there is a provision for certification by a certifying authority to be established under the GDPR. Whilst such certification does not reduce the responsibilities under the GPDR, it will act as prima facie evidence of GDPR compliance.

Conclusion

Non-compliance of the GDPR entails high fines and it is advisable for businesses dealing with EU markets to make themselves GDPR compliant. With the Supreme Court judgment on privacy and the Srikrishna Committee issuing its white paper on Data Protection framework, India too seems to be moving towards a more robust legislation on data protection and adherence to the GDPR requirements may be viewed as preparation for the same.

Contributed by: Ishan Johri