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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|
|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)
|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
|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.|
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:
- Filing of forms for financial statements – November 30, 2019; and
- 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.
In Part 2 we look at raising money through issuance of equity shares.
A company can raise money by issuing shares to existing shareholders or new investors, and this process is fairly simple as long as all investors are Indian residents.
Pros: Since the investment is being made in the shares of your company and is not being provided as a personal debt to you or as a loan to your company, there is no question of returning the investment at a later date and in most cases there is no requirement to provide dividends.
Cons: With third party capital you are bound to give up certain amount of control (Term Sheet), and always remember that the third party investor is looking for an exit, whether it is short term or long term. You should be very careful while negotiating exit clauses and try to avoid any form of excruciating promoter buybacks, where the promoter will end up having to buy back the shares of the investors mandatorily after a certain time period (and usually at a certain profit margin) in case they fail to provide an exit.
The biggest challenge when raising equity capital in the early stage is valuation. How do you agree how much dilution is ok? Wondering what we are talking about? Read our blog on the Valuation Game and how it affects your shareholding as a promoter in your startup.
Compliance check: While issuing shares always ensure that you obtain a valuation report for the shares from a merchant banker and do not undervalue them during issuance, since there can be severe tax implications in case you decide to issue shares at a price lower or higher (in case of angel investors) than the fair value.
Things to look out for: Do think about the dilution that the founding team will be facing. Considering that at an early stage the valuation of the company will be quite low, you may end up becoming a minority shareholder in your own company in case you raise too much money through the equity route at early stages. Also have a shareholders agreement in place which clearly identifies the rights of each party and ensures that there is no room for confusion at a later date. Equity investment in a private company can be uncharted territory for friends and family and make sure that you educate them on the risks involved prior to the investment.
With the Startup India series we plan to answer the ten most commonly asked common legal questions which we get asked. In the next part we answer “Raising money by issuing convertible instruments”
At LexStart we advise startups at various stages of growth on disclosure related compliances and non-disclosure arrangements. You can reach out to [email protected] with any specific queries that you may have.
Disclaimer: Please note that the article above is for information purposes only and represents the views of the author and should not be construed as legal advice.
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