Question

WHAT ARE THE LEGAL REQUIREMENTS THAT ANY COMPANY SHOULD COMPLY.WHILE THE INCORPORATION.

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Answer 1

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As an emerging market, India is one of the biggest and fastest growing economies in the world today. According to a report, India is cited as having the potential to become the third largest economy in the world within the next 30 years, behind only China and the USA. The "Make in India" campaign coupled with other initiatives taken by the Ruling Government, like “Skill India”, “Digital India”, etc., has stirred huge interest among various domestic and overseas stake holders (predominately, the startups!).

The incorporation of a company refers to the legal process that is used to form a corporate entity or a company. An incorporated company is a separate legal entity on its own, recognized by the law. These corporations can be identified with terms like ‘Inc’ or ‘Limited’ in their names. It becomes a corporate legal entity completely separate from its owners.

Steps in Incorporation of a Company

A group of seven or more people can come together so as to form a public company whereas, only two are needed to form a private company. The following steps are involved in the incorporation of a company.

1. Ascertaining Availability of Name

The first step in the incorporation of any company is to choose an appropriate name. A company is identified through the name it registers. The name of the company is stated in the memorandum of association of the company. The company’s name must end with ‘Limited’ if it’s a public company and ‘Private Limited’ if its a private company.

To check whether the chosen name is available for adoption, the promoters have to write an application to the Registrar of Companies of the State. A 500 rupee is paid with the application. The Registrar then allows the company to adopt the name given they fulfill all legal documentation formalities within a period of three months.

2. Preparation of Memorandum of Association and Articles of Association

The memorandum of association of a company can be referred to as its constitution or rulebook. The memorandum states the field in which the company will do business, objectives of the company, as well as the type of business the company plans to undertake. It is further divided into five clauses

1. Name Clause
2. Registered Office Clause
3. Objects Clause
4. Liability Clause
5. Capital Clause

Articles of Association is basically a document that states rules which the internal management of the company will follow. The article creates a contract between the company and its members. The article mentions the rights, duties, and liabilities of the members. It is equally binding on all the members of the company.

3. Printing, Signing and Stamping, Vetting of Memorandum and Articles

The Registrar of Companies often helps promoters to draw up and draft the memorandum and articles of association. Above all, with promoters who have no previous experience in drafting the memorandum and articles.

Once these have been vetted by the Registrar of Companies, then the memorandum of association and articles of association can be printed. The memorandum and articles are consequently divided into paragraphs and arranged chronologically.

The articles have to be individually signed by each subscriber or their representative in the presence of a witness, otherwise, it will not be valid.

Want to know the Promoters Contract ?

4. Power of Attorney

To fulfill the legal and complex documentation formalities of incorporation of a company, the promoter may then employ an attorney who will have the authority to act on behalf of the company and its promoters. The attorney will have the authority to make changes in the memorandum and articles and moreover, other documents that have been filed with the registrar.

5. Other Documents to be Filed with the Registrar of Companies

The First – e-Form No.32 – Consent of directors

The Second – e-Form No.18 – Notice of Registered Address

The Third – e-Form No.32. – Particulars of Directors

What are the Disadvantages of Incorporation ?

6. Statutory Declaration in e-Form No.1

This declaration, furthermore states that ‘All the requirements of the Companies Act and the rules thereunder have been compiled with respect of and matters precedent and incidental thereto.’

7. Payment of Registration Fees

A prescribed fee is to be paid to the Registrar of Companies during the course of incorporation. It depends on the nominal capital of the companies which also have share capital.

What are the Advantages of Incorporation?

8. Certificate of Incorporation

If the Registrar is completely satisfied that all requirements have been fulfilled by the company that is being incorporated, then he will register the company and issue a certificate of incorporation. As a result, the incorporation certificate provided by the Registrar is definite proof that all requirements of the Act have been met.

Solved Question for you

Question: List at least three clauses of the memorandum of association.

Answer – There are five clauses of the memorandum of association, stated accordingly

1. Name Clause
2. Registered Office Clause
3. Objects Clause
4. Liability Clause
5. Capital Clause

With the kind of growth story India has to share, entering the Indian market will prove to be very promising and beneficial for budding entrepreneurs and startup companies in the coming years. Having said that, conducting business in India would require keen ability to understand some complex and some not so complex realities associated to this country (bearing in mind the evolving policies of the Government, amendments to the existing statues and new laws enacted in the recent times). Our endeavor in this article is to broadly highlight one such facet of realities concerning the statutory, regulatory compliances, and the possible precautionary measures that the entry-level players should keep in mind while doing business in India, with more focus on the requirements under the Companies Act, 2013 (New Companies Act) and then on some other key legislations. Requirements under the New Companies Act Companies incorporated in India are primarily regulated by the recently enacted New Companies Act. The New Companies Act, amongst other provisions, lays down the detailed provisions regarding qualification, appointment, remuneration removal, retirement of directors, conducting board and shareholders meetings, passing of resolutions, related party transactions, the maintenance of books of accounts and the preparation and presentation of annual accounts (matters to be reported upon in the annual reports of the companies), periodical filing of forms with the Registrar of Companies, etc. Once all the legal formalities required for incorporation are completed and the certificate of incorporation is issued to the company, the company is recognised as a separate legal entity in the eyes of law, distinct from its members who have incorporated such entity. Whether the company is a private company or a public company, several things are required to be done post incorporation. There are matters which are required to be undertaken in the first Board meeting immediately post incorporation, and then there is work which is required to be done on regular and periodical basis. A company does its business through directors who are responsible to ensure the above compliances. As soon as the company is incorporated, but no later than 30 days, a director should call for the first board meeting by issue of notice (together with the agenda) of the meeting at least seven days before the meeting. A number of matters then need to be resolved upon in this first board meeting. The company must also have the name board outside the registered office address, with its name, registered office address, Company Identification Number, e-mail ID, and phone number (which are mandatory now), website address and fax number, if any, stated on it. These details are also required to be printed on all business letters, bill-heads, and all other official publications. If PAN has not been applied for along with the incorporation, then immediately after incorporation, the company must apply for PAN and TAN. The company has to convene regular board meetings in the calendar year and prepare the minutes of the meeting of the Board of Directors and the shareholders meeting, and the same has to be maintained as a permanent document till the life time of the company. Within 30 days from the meeting, the minutes have to be prepared, duly signed, and maintained in a minute’s binder. Like the same way on allotment of shares, the company has to issue share certificates to those who have been allotted shares and the company has to maintain members register and share allotment register. A company is required to file its balance sheet, profit and loss account, auditor’s report, and annual return every financial year before the due date, with the Registrar of Companies. In addition to that, there are several instances wherein the company has to intimate the concerned Registrar of Companies, on the timely basis, about the appointments of directors, removal and certain other changes in the prescribed manner. The New Companies Act has also introduced the CSR (Corporate Social Responsibility) provisions where the corporate entities are obligated to undertake certain philanthropic activities. All companies which satisfy the CSR criteria will have to undertake CSR activities during the given financial year. The above compliance requirements under the New Companies Act, which a company must comply, is not a comprehensive list. Some companies may also require registration for service tax, VAT, professional tax, shops, and establishment. It is pertinent to note that the responsibility of compliance is not a one-time affair, but in fact a continuous process. Requirements under the Labor and Employment Legislation Next, businesses with production lines, factories, would also have to consider and comply with a host of statutes such as the Employees' State Insurance Act, 1948; the Maternity Benefits Act, 1961; the Industrial Disputes Act, 1948; The Contract Labor (Regulation and Abolition) Act, 1970; the Trade Union Act, 1926; the Equal Remuneration Act, 1976; the Payment of Gratuity Act, 1972; the Workmen’s Compensation Act, 1923’ the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, etc. The above statutes govern issues such as working time and conditions of employment of workers, minimum wages and remuneration, rights and obligations of the trade unions, insurance of the employees, maternity benefits, employment retrenchment, payment of gratuity/provident fund, payment of bonus, regulations of the contract labor and such other issues concerning the employees. The company should ensure that proper compliances of these various statues vis-à-vis its employees are in place and the employee policies are formulated accordingly. Requirements under the Environmental Law Environmental and pollution control matters are governed by various statutes such as the Environment (Protection) Act, 1986; the Water (Prevention and Control of Pollution) Act, 1974; the Air (Prevention and Control of Pollution) Act, 1981; Hazardous Wastes (Management, Handling and Trans boundary Movement) Rules, 2008; the Manufacture, Storage and Import of Hazardous Chemicals Rules, 1989; the Indian Forest Act, 1927; the Forest (Conservation) Act, 1980; the National Environment Tribunal Act, 1995; the Public Liability Insurance Act, 1991, etc. A company is required to comply with the provisions of these environmental laws to the extent specifically applicable to the business operations of such company. Consequences of non-compliance with the relevant provisions of any such statutes and rules framed there under are provided in the respective statutes. Tax and stamp duty India has a federal tax structure and taxes are levied by the Central Government, the State Governments, and the local regulatory authorities. These taxes are broadly in the nature of (i) Direct Tax (which includes income tax, wealth tax, dividend distribution tax, minimum alternate tax (MAT), share buy-back tax), (ii) Indirect Tax (which includes VAT/CST, Service Tax, Excise Duty, Customs Duty, Entry Tax, R&D Cess), and (iii) Levies on transaction (which includes stamp duty, securities transaction tax, and commodity transaction tax). All the Indian companies are subjected to payment of tax and stamp duty for their business transactions undertaken during the course of any financial year and on the income generated from such operations. Non-payment (inadequate and/or untimely payment) of tax and stamp duty may attract moderate to heavy penalty, cause enforceability issue of the document and, in some cases, impounding of the documents by the authority. Concluding thoughts While the above lays down the general laws governing a company in India, local laws also play a very important role. As such depending in which state the company is registered or state and city in which its operations are conducted, the company must be mindful of and adhere to the laws of such state/ city. Over the past several years, the policy and procedures regulating and governing the Indian corporation have been progressively liberalised and simplified. However, there are several compliances requirements that need to be adhered to, failing which there could be consequences of disqualification of directors, attracting of penal provisions and in some cases even imprisonment of the directors and key personnel.