Designing your Stationary? Ensure you include these.

Under the Companies Act in India, every company is required to mention certain items on its letterhead and visiting cards. It is therefore pertinent that you include these items while designing your startup’s letterhead and visiting card.

Dormant Company – What does it mean? And how to go about it?

Foreward by Anisha Patnaik, Co-Founder

When one decides to discontinue their business operations, the first option that comes to the mind is shutting down the company. This almost always seems to be the way out, because, one doesn’t want to get into the hassle of maintaining compliances for an inactive entity. However shutting down or “winding up” as is referred to in the legal parlance, can be a long process involving paperwork. Moreover, what if you change your mind and want to restart operations again? If you have gone down the long winded route of “winding up”, you will have to incorporate a fresh company all over again.    

It is for such situations, that the Indian law has provided for changing the status of a company from “Active” to “Dormant”. It is almost like putting a company in a deep freezer for some time, till you are ready to bring it out and start running again. The advantage of keeping a company dormant is that you do not have to comply with all the requirements under the Companies Act. The compliance requirement is minimal and hence the cost of running or keeping operational an otherwise unoperational company is low. And, you can almost immediately change the status of the company back to “Active” if you decide to revive it.  Of course, one cannot keep a company in “dormant” state forever. The law prescribes 5 years as the maximum period for “dormant status” of a company, post which, if the company is not revived, the Registrar of Companies (Ministry of Corporate Affairs) will automatically strike off the company’s name from its records!

Read more, in detail about the “Dormant Status” in the below article, by our Compliance LexStar, Hamza Boxwala.     

What is a dormant company?

Dormant Company is a company which is not carrying on any business or operation. As per Section 455 of the Companies Act, 2013 (“Act”), where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar of Companies (“RoC”) for changing it’s status to that of a dormant company.

When can a company be called “Inactive”?

“Inactive” means the company has not been carrying on any business or operation, or has not made any significant accounting transaction during the last 2 financial years or has not filed financial statements and annual returns during the last 2 financial years.

“Significant accounting transaction” means any transaction other than 

  1. Payment of fees to the Registrar.
  2. Payments made by it to fulfill the regulatory requirements.
  3. Allotment of shares.
  4. Payments made for maintenance of office and records.

When a voluntary application is filed with the RoC for dormant status or when a Company defaults in statutory annual filings for a consecutive period of 3 years, the RoC changes the status of the company from “Active” to “Dormant”.

Dormant status can be obtained for all type of companies. This includes private limited, public limited and OPC.

What are the conditions to be fulfilled before applying for dormant status?

  1. The company should not have been carrying on any business or operation, or not made any significant accounting transaction during the last two financial years or has not filed financial statements and annual returns during the last two financial years
  2. In case there is any unsecured loan in the Company then consent of the lender should be obtained.
  3. Statement of Assets and Liabilities should be obtained from Statutory Auditors of the Company.
  4. No dispute certificate should be obtained from the management or promoters of the Company.

Are there instances when a company may fulfill the above conditions, and yet be ineligible to apply for dormant status?

Set out below are few instances, when a company can be disqualified from converting to a “dormant” status, inspite of fulfilling the conditions prescribed under the Act:

  1. Where any inspection, inquiry or investigation has been ordered or taken up against the company or prosecution has been initiated against the company and pending under any court.
  2. Where it has any public deposit or interest thereon outstanding for payment.
  3. Where there is any secured creditors in the Company.
  4. Where the company has any outstanding tax dues either to central or state government or local authorities and has defaulted in payment of workmen dues.
  5. Where the company is listed in stock exchange.

Does a dormant company also have to comply with any filing requirements?

 Yes, a dormant company will have to comply with certain compliance requirements, although these are very minimal. Listed below are the compliance requirements:

  1. A dormant company should file ”Return of Dormant Company” every year indicating the Company financial position duly audited by Chartered accountant in practice in Form MSC-3.
  2. A dormant company is required to convene at least one Board meeting in every six months.

What are the benefits of having dormant status?

  1. To revive and operate a company you intend to use in future.
  2. To protect your interest and reputation as a sole trader.
  3. To hold a fixed asset such as a property.
  4. Less compliance.

What is the procedure for conversion of status from dormant to active company?

If company that has been declared as “dormant” starts carrying out significant transactions, then within 7 days from the date of undertaking such transaction, the company will have to file an application with the RoC in form MSC-4 accompanied by a return in Form MSC-3 to get back the status active from the earlier status of dormant.

After considering the application, the RoC will issue a certificate in Form MSC-5 approving the change of status of the dormant company to active company.

For how long can a company continue in “dormant status”?

A company can continue in dormant status for a maximum period of 5 years. Before the expiry of 5 years, the company will have to apply for changing the status to “Active”, otherwise the name of Company shall be struck off by the RoC.

How long does it take to change the status of a company from “active” to “dormant”?

It takes around 1-2 months to complete the whole process of obtaining dormant status subject to the satisfaction of queries if any of the RoC.

P2P Lending Regulations – Important Provisions You Should Know

The Reserve Bank of India, in its recent notification, has brought in platforms carrying out the business of P2P lending under the purview of NBFC. Below are the key provisions:  

  1. Any business proposing to carry out business of Peer to Peer (“P2P”) Lending will be required to register with the Reserve Bank of India (“RBI”).
  2. Existing entities carrying out the P2P business will have to register within 3 months of the notification
  3. Dos and Don’ts
    1. What can a registered P2P entity do?
      • Act as an intermediary providing an online marketplace or platform for P2P lending.
      • Ensure adherence to legal requirements applicable to the participants.
      • Store and process all data relating to its activities and participants on hardware located within India.
      • Undertake due diligence on the participants and undertake credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders.
    2. What are the restrictions on a registered P2P entity?
      • Cannot raise deposits.
      • Cannot lend on its own.
      • Cannot provide or arrange any credit enhancement/credit guarantee.
      • Cannot facilitate or permit any secured lending linked to its platform.
      • Cannot hold, on its own balance sheet, funds received from lenders for lending, or funds received from borrowers for servicing loans.
      • Cannot cross sell any product except for loan specific insurance products.
      • Cannot permit international flow of funds.
  4. Prudential Norms
    • A P2P entity shall maintain a Leverage Ratio not exceeding 2.
    • The aggregate exposure of a lender to all borrowers at any point of time, across all P2Ps, shall be subject to a cap of INR 10,00,000/-.
    • The aggregate loans taken by a borrower at any point of time, across all P2Ps, shall be subject to a cap of INR 10,00,000/-.
    • The exposure of a single lender to the same borrower, across all P2Ps, shall not exceed INR 50,000/-.
    • The maturity of the loans shall not exceed 36 months.
    • P2Ps shall obtain a certificate from the borrower or lender, as applicable, that the limits prescribed above are being adhered to.
  5. Mode of Transfer of Funds
    • Fund transfer between the participants on the P2P lending platform shall be through escrow account mechanism, which will be operated by a trustee.
    • The P2P entity needs to set up at least 2 escrow accounts – 1 for funds received from lenders and pending disbursal, and the other for collections from borrowers.
    • The trustee shall mandatorily be promoted by the bank maintaining the escrow accounts.
  6. Prior written permission of the Bank shall be required for:
    • Any allotment of shares which will take the aggregate holding of an individual or group to equivalent of 26% and more of the paid up capital of the P2P entity.
    • Any takeover or acquisition of control of a P2P entity, which may or may not result in change of management.
    • Any change in the shareholding of a P2P entity, including progressive increases over time, which would result in acquisition by/ transfer of shareholding to, any entity, of 26% or more of the paid up equity capital of the P2P entity.
    • Any change in the management of the P2P entity which would result in change in more than 30% of the Directors, excluding Independent Directors.
    • Any change in shareholding that will give the acquirer a right to nominate a Director.
  7. Public Notice about Change in Control/ Management
    • A public notice of at least 30 days shall be given before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control, whether with or without sale of shares. Such public notice shall be given by the P2P entity and also by the other party or jointly by the parties concerned, after obtaining the prior permission of the Bank.
  8. Intimation Requirements – Change of address, directors, auditors, etc. RBI needs to be intimated about any of the following changes, within 30 days from the change:
    • The complete postal address, telephone number/s and fax number/s of the registered / corporate office.
    • The residential addresses of the Directors of the company.
    • The names and office address of the auditors of the company.
    • The specimen signatures of the officers authorised to sign on behalf of the NBFC-P2P to the Regional Office of the Department of Non-Banking Supervision of the Bank within whose jurisdiction the Registered Office of the P2P entity is located.
  9. Reporting Requirements 

The following quarterly statements are required to be submitted to the RBI within 15 days of the end of each quarter:

  • A statement, showing the number and amount in respect of loans (quarterly).
  • The amount of funds held in the Escrow Account.
  • Number of complaints outstanding at beginning and at end of quarter, and disposed of during the quarter.
  • The Leverage Ratio, with details of its numerator and denominator.