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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.

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

Did you know that registering for Startup India is a breeze? Myth Vs. Reality!

Given our experience in helping startups obtain Startup India recognition, we are surprised at how many people still think it is a cumbersome exercise. The process is so easy and painless, that getting a Startup India recognition now is less than a day’s job!

Startup Recognition now takes only a day!

In this blog, LexStart aims to clarify the popular myths around the process for a Startup India recognition. Please click here to read more.

Are you a recognized Startup?

If you haven’t heard about the Startup India Initiative, then you’ve definitely been living under a rock! The initiative was launched last year with much fanfare to encourage entrepreneurship and promote sustainable growth within the Indian startup ecosystem. In fact, it was only in 2016 that “startup” was defined as a separate term[1] by the Department of Industrial Promotion and Policy (“DIPP”). But despite many incentives for startups such as tax benefits, credit availability etc. it wasn’t very well received by the startup community. After taking feedback and suggestions from various stakeholders within the startup ecosystem, the government reassessed its Action Plan and in May 2017 and the DIPP[2] notified a broadened definition of the term “startup” (discussed below), relaxed the norms for eligibility and made the process for recognition of startups much simpler. As a result of this much needed amendment as of now 3160[3] startups have been recognized and 67 out of those have already received funding support from the government!

[1] DIPP Notification No. G.S.R. 180(E) dated February 17, 2016

[2] DIPP Notification No. G.S.R 501(E) dated May 23, 2017

[3] http://startupindia.gov.in/ (last visited August 30, 2017)

The eligibility criteria for “Startup” recognition is now broader!

Having assisted multiple startups with their application for recognition, over a period of time we felt there was dearth of information regarding the relevant documents and the process of application. In this blog post we would like discuss the relevant details and information that an applicant must furnish as well as keep in mind the key parameters for the eligibility criteria for recognition of a startup. We hope to bring clarity and help many applicants realize their dream of being recognized as a startup.

But before we delve any further, it is imperative to understand the revised definition of a startup which will help in understanding the process of application and the key parameters that applicants must keep in mind. The broadened definition of startup is:

  1. It has to be an entity, i.e., a private limited company or an LLP or a registered partnership firm
  2. It should be less than 7 years’ old. In case of a biotechnology company, this limit is 10 years.
  3. The entity must not be formed by splitting up, or reconstruction of an existing business.
  4. It should not have annual turnover exceeding INR 25 crore in any preceding financial year.
  5. It should be working towards innovation, development or improvement of products or processes or services, with a scalable business model and can generate employment opportunities or wealth creation.

If an applicant fulfills the above mentioned criteria, then it may be eligible to apply for recognition as a startup.

Certificate from Incubator not mandatory anymore!

Let us now proceed to understand the application process, necessary documents and other relevant information that an applicant must furnish with its application:

  1. The application can be made online either through the DIPP web portal[1] or via their mobile app.
  2. Following documents are required to be submitted:
  • KYC (Know Your Customer) details, i.e., certificate of incorporation, registered office address, details about the directors or partners, authorized representatives of the company, number of employees etc.
  • Details of all or any intellectual property rights that the applicant may have registered or applied for. This includes the entire gamut of IPRs such as trademarks, patents, copyrights, design and plant varieties.
  • Identify the industry, sector and category.
  • To facilitate ease of doing business in India, the government has introduced self certification of the application. That means that it has eliminated regulatory and bureaucratic hurdles of obtaining recommendation and support letters from incubators and industry associations.

Once all the basic details regarding the entity are filled in, we come to the section that we believe can make or break the chances of receiving the recognition. Every applicant must keep in mind the revised definition a startup that is, an entity that is working towards innovation, improvement (existing product/service/process) and scalability. Applicants are required to submit a brief note highlighting how their startup is supporting these 3 key parameters in about 250 words. This section also requires the applicant to indicate the current stage of development of its product that is, whether it is in ideation, validation, early traction, or scaling stage. Apart from this, applicants may submit links to their website, any videos and press coverage of their entity. The application also requires applicants to submit a pitch deck, however, in our experience, essentially, the applicant has to submit an overview of their business and their business plan. Any document whether it is a brief profile of the startup, or an executive summary or a pitch deck that elucidates this would suffice

This sums up the application process for recognition of a startup. Unless there are issues, a certificate of recognition is granted within 3-4 days (sometimes even 1) of making an application.

Startup recognition can be obtained in less than 7 days!

It goes without saying that the Government has taken steps to simplify the application and kudos to the government for that. For instance, it comes as a huge relief that the self certification has been introduced and that the age limit for startups have been extended. But like all things new there are teething issues and of course, there are areas of concern that need to be looked at; for instance, we believe that at present the list of industries is not exhaustive. The Indian startup ecosystem is young and extremely dynamic. However, the list of industries is very limited and in our experience, a number of industries are missing from the list. This poses a huge problem for applicants. Kudos to the government for relaxing the age limit for startups, but we feel that there are many startups that have a longer gestation period and age limit of 7 years may be unfair to quite a few. Further, we also feel that a lot of startups may not be able to meet the criteria of employability and wealth creation in their early stages. Having said that, we also believe that the government has taken steps in the right direction. Over the next few years we hope to see favorable amendments that will benefit the entire startup ecosystem and give the Indian entrepreneurial spirit the impetus that it truly deserves!

Did you know that there is a mandatory 1 year cliff on ESOPs?

CLiff (3)

A cliff or a moratorium is the time period between grant of ESOPs to an employee and vesting of the ESOPs. Under the Indian Companies Act, 2013, there has to be a mandatory one year gap between granting and vesting of ESOPs by companies in India. Why does it matter?

It matters because in most start-ups, the promoters tend to offer ESOPs to employee as part of the compensation in the offer letter. It is one of the primary benefits to employees used by start-ups. However, a promise to give ESOPs in an offer letter is not “granting” of ESOP. The 1 year cliff does not start from the date of the offer letter. An ESOP is said to have been “granted” only once the company has taken steps to put in place an ESOP Policy, such ESOP Policy is approved by the Board and Shareholders of the Company and then the company issues a Grant Letter summarizing terms of the ESOP Policy and specifying the details of the ESOP grant to the employee.

Take a scenario where you worked really hard to get Swati Pandey, a super sharp programmer who has the makings of a future leader onboard your startup, wrestling her away for competitive offers from other companies and startups. Swati joined your company in March 2015 with a promise of ESOPs with 1 year vesting. Swati would, therefore, have been entitled to buy shares against the ESOPs upon them being vested in March 2016. However, like most start ups, you delayed putting in place the ESOP Policy and finally issued a grant letter to Swati only in November 2015. As a result, the vesting of Swati’s ESOP would now get delayed to November 2016. You would ask, why can’t the vesting be accelerated, after all the delay in vesting was because of you, so you should have the discretion to accelerate the vesting. Unfortunately, due to the one year mandatory cliff period under the law, the vesting of ESOP cannot be accelerated to less than a year from the grant of the ESOPs.

It is, therefore, important that if as an employer you are bringing employees on board with a promise to grant ESOPs, do not delay granting of the ESOPs. By doing so, you would effectively be delaying the vesting timeline for your employee, who is anyway working hard for you from Day 1.

Want to understand more about ESOPs? Sign up with LexStart here and get access to our tutorials and FAQs for free.