Recent Amendments to the Companies (Incorporation) Rules, 2014

By Husain Kader

The Ministry of Corporate Affairs (MCA) has issued a recent notification dated 16th October, 2019 notifying the Companies (Incorporation) Eight Amendment Rules, 2019 to amend the Companies (Incorporation) Rules, 2014.

The amendments are summarised below:

Sr No. Particulars Erstwhile Provision After Amendment Remarks
1. Undesirable Names

 

Rule 8A

Earlier if the name of the proposed company included a registered trademark then approval from the owner or the applicant for registration of trademark had to be obtained by the promoters of the proposed company before making name application to ROC. Now the option to get approval from the applicant for registration of trademark has been removed.

 

Now approval has to be obtained from the owner only.

The Owner and applicant for registration of trademark could be two different persons and therefore earlier there was an option.

 

Now the rule has been made more stringent and the approval of the present owner is necessary.

2. Active Company Tagging Identities and Verification (ACTIVE)

 

Rule 25A

Earlier if a company was marked as ACTIVE-non-compliant than unless e-Form ACTIVE was filed the company was not able request for any changes in director information by filing Form DIR-12 except in case of cessation. Now if a company is marked as ACTIVE-non-compliant than it will not be able to request for any changes in director information except in the following cases:

 

1.   cessation of any director; or

2.   appointment of directors in a company where total number of directors fall below the minimum limit as provided in the Act on disqualification of all or any of the director; or

3.   appointment of any director in such company where DINs of all or any of its director(s) have been deactivated; or

4.   appointment of director(s) for implementation of the order passed by the Court or Tribunal or Appellate Tribunal.

MCA has liberalized the ACTIVE rule to allow changes to be made to the information of directors to allow appointment or cessation of directors where it becomes absolutely necessary  in cases which may  lead to non-functioning of the Board of Directors of a company or non-compliance of the Companies Act.
3. Shifting of registered office within the same State

 

Rule 28

After amendment the MCA has added the following rules to the present provisions:

 

1.   The Regional Director (“RD”) shall examine the application seeking confirmation from the RD for shifting the registered office within the same State from the jurisdiction of one ROC to another ROC and the application may be put up for orders without hearing and the order either approving or rejecting the application shall be passed within 15 days of the receipt of application complete in all respects; and

 

2.   The certified copy of order of the RD, approving the alternation of MOA for transfer of registered office company within the same State, shall be filed in Form No. INC-28 along with fee with the Registrar of State within 30 days from the date of receipt of certified copy of the order.

The Rule has been made more stringent by the MCA whereby now an order shall be passed by the RD after examination of all the submitted documents and such order shall have to be filed in Form INC-28 (which is an added compliance to be followed) for shifting of registered office.

 

Important Update – Annual Filings

 

As per a recent notification dated October 29, 2019, the Ministry of Corporate Affairs (“MCA”) has provided relief to the stakeholders by relaxing additional fees and extending the last date of filing for the following for the financial year which ended on March 31, 2019 to:

  1. Filing of forms for financial statements – November 30, 2019; and
  2. Filing of annual returns – December 31, 2019.

On failure to file the forms by the above due dates, an additional fees of INR 100/- per day for each day of default will become applicable.

Important Update | Dematerialization of Securities Mandatory from August 1, 2019

Dematerialization of Securities Mandatory from August 1, 2019

As per a recent amendment to the Companies Act, 2013, every private limited company may have to maintain its shares in dematerialised form, w.e.f. August 01, 2019.

While a specific timeline for dematerialisation has not yet been notified, it is important that every private limited company takes steps immediately to dematerialise their securities, before making any fresh offer for issue/buyback/transfer of any securities to any investors or existing shareholders.

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

If one is incorporated as a private limited company does he need to get a trade license from the municipality?

Trade license is permission granted in form of a certificate by State government to carry on any business/trade for which it is issued. Trade license is regulated to ensure that the citizen is not adversely affected by Health Hazard & Nuisance by the improper carrying of a trade.

The trade license is a means to ensure that the manner and locality in which the business is being carried on is according to the relevant rules, standards and safety guidelines. It is issued by the municipal corporation of the place where business is located. A trade license is a permission to carry on a specific trade or business at the premises for which it has been issued. Any unauthorized running of trade is an offense which may result in a substantial penalty and subsequent prosecution.

The business owners must apply for trade license is required in particular area without any delay. An application must be made before the commencement of the activity. However, some state governments allow up to 3 months’ time to seek a trade license. License once issued requires periodical renewal on annual basis. Application for renewal must be filed at least 30 days before expiry of license.

As per shops and establishment act, it is mandatory for three kinds of business:

1. All the eating establishments like hotels, restaurants, canteen, food stall, bakeries, the sale of vegetables, meat, provisions store, etc.

2. Trades which use motives like manufacturing industries, factories, power looms, flour mills, cyber cafe, etc.

3. Offensive and dangerous trades like a barber shop, dhobi shop, timber wood, sale of firewood, candle manufacturer, cracker manufacturer, etc.

Documents required for obtaining trade license:

1. Pan card of the establishment in case of company, LLP or Firm;

2. Canceled Cheque and bank statement of the establishment;

3. Certificate of Incorporation, MOA, and AOA of the company or LLP/ Partnership Agreement as the case may be;

4. Premises proof of the establishment in the form of Sale Deed, Electricity Bill/water bill and NOC from the owner;

5. Colour photograph, Pan card and ID Proof and Address Proof of all Directors/ Partners;

6. Photograph of the establishment with the display of goods traded from the premises; and

7. Site/Key plan showing the area under the occupation of the applicant earmarking the neighborhood of the site.

Is it mandatory to have audited balance sheet for a newly formed private limited company?

A private limited company is the most popular form of starting a business, there are various compliances which are required to be followed once a private limited company is incorporated including getting the balance sheet audited by the statutory auditors of the Company.

Every newly formed private limited company is required to appoint first statutory auditors of the Company, within 30 days of incorporation and in case of failure of the board to appoint such auditor, it shall inform the members of the Company who shall within 90 days at an extraordinary general meeting appoint such statutory auditor who shall hold the office till the conclusion of the first annual general meeting.

Every private limited company is required to file its balance sheet along with a statement of profit and loss account and director report within 30 days of holding of the annual general meeting.

Thus it is mandatory for every newly incorporated company to get its balance sheet audited and hold its first AGM within nine months from the closure of the financial year of the company and thereafter within six months from the closure of the financial year of the company.

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.