Incorporation of a Company and Post Incorporation Compliance under Companies Act, 2013

Introduction:

Incorporation simply means a legal formation of a company. If a company is not formed legally, it cannot carry out its business activities. For carrying out the business activities, a company needs a certificate of incorporation and a certificate of commencement of business. Certain steps are the basis for the successful incorporation of a company. These steps are mentioned below-

1. Obtain a digital signature certificate for the proposed director/directors.
2. Obtain director identification number for the proposed director/directors.
3. Select a suitable company name and make an application to the ministry of corporate affairs for the availability of a name.
4. Draft memorandum of association and articles of association.
5. Sign and file various documents including MOA and AOA with the registrar of companies electronically.
6. Payment of a requisite fee to the ministry of corporate affairs and also stamps duty.
7. Scrutiny of documents at Registrar of companies.
8. Receipt of certificate of incorporation from ROC.

Relevance and Scope of Incorporation[1]

The relevance of incorporation can be interpreted by the analysis and apprehension of advantages that the incorporated company or business derives after its incorporation. The following advantages are available after the incorporation of a company. These are as follows-

Credibility and ownership advantage

The word incorporation is linked to the stability and credibility of a business. Statutory authorities, landlords, suppliers, customers, etc. are generally of the opinion that incorporated companies have a long-term commitment. Potential investors and customers may think to invest in well-established companies.

Transfer of ownership is easy in the case of incorporated companies. The owner of the incorporated companies may assign its shares or sell them to a partner. Thus, ease in transfer of ownership guarantees the perpetual existence of corporations as the business just gets transfers into the hands of another person.  

Management and investment advantages

The incorporation of a company creates a better structure of management. This leads to centralized decision-making. Banks generally prefer to lend money to a corporation. Therefore, corporations have access to a variety of capital sources.

Tax benefits and liability protection

Personal assets of the owner of an incorporated company are not affected in case of discharge of liability.

Corporations are entitled to tax deductions for different types of operating costs which ultimately reduces the company’s overall tax liability.

Scope of incorporation of companies can be understood by interpreting the legal status of incorporated companies as incorporated co. is a separate legal entity from its members. Therefore, incorporated companies can enter into contracts, including contracts of employment or supply. It can also sue or be sued.  

History of Company Incorporation Legislation in India

Joint Stock Companies Act, 1850: The company legislation in India originated from English Company Law. Indian company laws are referred to as the English company laws and are modified as per the Indian situation.  The first legislative act of registering joint-stock companies was passed in the year 1850. As per this act, the company was given the status of a distinct legal entity but the company was not granted the privilege of limited liability.

Joint-stock Companies Act, 1857: Through this act, the benefit of limited liability was granted to members of the company. Though, this act did not grant the benefit of limited liability to banking and insurance companies.

Joint Stock Companies Act, 1860: This act granted the benefit of limited liability to banking and insurance companies.

The Companies Act, 1866: This act was intended to consolidate and amend the laws relating to the incorporation, winding-up of trading companies, and their regulation.

Companies Act, 1913: This act did not consider the specific features of Indian trade and commerce. It also did not consider some institutions such as ‘managing agency’

Companies Act, 1956: After World War II, the government of India appointed a committee of 12 members under the chairmanship of Shri H.C. Bhabha for review of the companies act, 1913. Thus, the companies act, 1956 was passed after the recommendation of the Bhabha committee.

Companies Act, 2013: This act has been notified in the official gazette on 30^th August 2013.

Incorporation of a Company

Incorporation is a legal process through which a company or any corporate entity is formed or established. The incorporation process declared a company as separate from its owners or investors.

Essentials of Incorporation[2]

1. To check the company’s master data on the ministry of corporate affairs portal to confirm paid-up share capital, authorized share capital, registered office address, E-mail ID, Company status, and date of incorporation.
2. The company needs to display the name of the company, registered office address, corporate identity number, etc. outside its registered office.
3. The first board meeting is to be conducted within 30 days of incorporation which will include noting the situation of the registered office address and taking on record the certificate of incorporation of the company.
4. Allotment of securities is to be made after passing a board resolution.
5. Application in relation to cst, vat, service tax shall be made to authorities for different purposes.

Procedure for Incorporation of Company

SPICE+ (Part A)

1. Two names can be proposed if the application is made only for names, i.e. if SPICE+ part A is individually submitted.
2. If complete SPICE+ is submitted for reservation of name and incorporation then, only 1 name can be proposed.
3. Details which need to be furnished will be the type and category of company.
4. Object clause of the company is to be specified.
5. The industrial activity of the company is to be mentioned.

SPICE+ (Part B)

1. The capital structure of the company (in case of share capital): Minimum subscriber and authorized share capital required for OPC is 1 rupee. For private company share capital are 2 rupees and 7 rupees for a public company having a share capital.
2. The capital structure of the company in case it’s not having a share capital): Company should enter the number of member details if it’s not having a share capital.
3. Details of Number of Members: Maximum number of members should not be more than 200 in the case of private companies and there is no limit of members excluding employees in public companies.
4. Correspondence address: You have to select yes if the address of correspondence is a registered address of the office and a copy of the utility bill is to be attached that is older than 2 months or if no is selected then, the company will have to establish its office which is registered within 15 days after approval of incorporation in form INC-22.
5. Details of Directors and Subscribers: It is to be specified.

AGILE PRO: It is to be filled as a linked e-Form with SPICE+ for purpose of registration with GSTN, EPFC, ESIC, bank account number, and professional tax number.

ELECTRONIC MOA & AOA: It is also to be filed as a linked form to SPICE+.

INC-9 declaration shall be auto-populated basis data filled in part B.

User needs to click on the option of upload forms: It is to be done after affixing DSCs in SPICE+ part B PDF and all other linked forms. 

Unique service request number generation: It gets generated after the successful upload of forms and is also displayed to the applicant.

At last, the registrar enters the name of the company in the register and issues a certificate of incorporation.

Different Ways of Incorporating Company

Application for registration is to be filed with Registrar within whose jurisdiction the registered office of the company is to be situated in SPICE+. A fee is also to be paid as mentioned under companies’ rules, 2014.

Earlier there was SPICE for incorporation. It was an MCA form in pdf format. At present SPICE+ is used.

Attachments required for SPICE+:

1. Declaration by the first director
2. Copy of utility bills
3. Copy of certificate of incorporation
4. Consent of Nominee (INC-3) etc.

It is a web-based form that is to be filled on the MCA site itself. AGILE can be filed for EPF registration, ESI registration, and GSTIN registration along with that form.

 Now, AGILE- PRO is followed. It serves the purpose of 2 new services that can be applied by it.

Attachments required for Agile pro-

1. Proof of appointment of the authorized signatory for GST.
2. Proof of principle place for business.
3. Letter of authorization etc.  

Professional tax registration

Opening bank account of the company

It is a web form with a single window that operates for multiple services.

Other online forms that can be filed are SPICE+ MOA and SPICE+ AOA.

This particular form has 2 parts-

Part A is for the reservation of names of new companies.

Part B offers multiple services for registration.

URC-1 INC-9 PDF generations-

It is compulsory to file a URC-1 form including details of the existing entity in the case of part-1 companies. INC-9 declaration form shall be auto-populated in the dashboard for downloading & affixing DSCs.

Incorporation of the company through various stage-wise forms-

• MCA 21 portal under the ministry of corporate affairs
• E-BIZ portal under DIPP, ministry of commerce and industry

Certificate of Incorporation

Certificate of incorporation serves as definite proof that all the specified requirements of the companies act have been met by the company which is being incorporated. It is issued only after the fulfillment of all the requirements that are mentioned in the companies act. This certificate is proof that a company is constituted correctly.  It contains important details such as the date of incorporation and registration number of the company etc. This document marks the date of birth of the company. A company formation agent can help you if a certificate of incorporation is lost.

Legal Provisions Related to Incorporation of Companies

All those companies which can be incorporated and registered are mentioned under the provisions of the company’s act, 2013. To incorporate a company means to establish or to form a company that is legally distinct from its owner and has perpetual existence.

Section 3(1) of the Companies Act, 2013

This section states that a company may be established for lawful purpose by-

1. 7 or more persons in case the company which is to be formed is a public company.
2. 2 or more persons in case the company which is to be formed or established is a private company.
3. 1 person, where the company to be formed is a one-person company, i.e., a private company by subscribing his name to memorandum and complying with the requirements of this act with regard to registration. Following companies are formed under section 3(1) –
4. A company limited by guarantee
5. A company limited by shares
6. An unlimited company

Memorandum of Association

MOA is a document that contains all rules and regulations that govern the relations of a company with other business enterprises. It also specifies the powers of the company along with the conditions under which the company operates. It explains the objective and aim of the company for which it is formed.

Section 4(1) – Particulars of Memorandum of Association

• The name of the company is to be stated with the last word “private limited” with respect to a private limited company and the last word “limited” with respect to a public limited company.
• The state in which the company’s registered office is to be situated is also mentioned in the memorandum.
• The objectives for which the company is said to be incorporated and any matter considered necessary in furtherance thereof is also to be specified.
• The liability of members is to be stated whether it is limited or unlimited. Liability of members in the case of a company limited by shares is limited to the amount unpaid on the shares held by them. The amount of share capital with which the company is registered and the number of shares to which subscribers to the memorandum agree.
• The name of the person who shall become a member of the company in the event of death of the subscriber in case of a one-person company is to be mentioned.

Articles of Association

This is a legal document that is subordinate to the memorandum of the company. It specifies the rights of employees, the organization’s structure, control mechanism, and mode of conduct of directors meeting/ AGM of shareholders. All the rules, regulations, and bye-laws of the company are included in articles of association which further take into account the aspects of internal administration/ management of the company.

Section 5(1) – States that articles of a company shall contain regulations for the purpose of management of internal affairs and code of conduct of the company.

Section 7(1) – This section states the documents and the information which is to be filed at the time of incorporation of the company with the registrar within whose jurisdiction the registered office of the company falls.

Post Incorporation Compliance

Post incorporation compliances are the legal norms that are to be followed by every company after its incorporation. If the company does not follow these post incorporation compliances then, fines and penalties can be imposed on the directors as well as the company. Some of the essential post incorporation compliances include sharing certificates, maintaining a statutory register appointing an auditor, and opening the bank account.

All the persons who are willing to incorporate a company must be aware of the post-incorporation compliances well in advance because ignorance of the law is not an excuse. No person can prevent liability based on unawareness of the law.

Post Incorporation Compliances (International Perspective)[3]

Section 380- Documents and information to be delivered to Registrar by foreign companies

After the establishment of its place of business in India, every foreign company has to submit certain documents within 30 days. These are as follows-

1. Memorandum, articles or charter, and statutes that define the constitution of a company. If such document is not in English then, a translated copy of such document in the English language has to be submitted.
2. The full address of the principal office or the registered office of the company is to be submitted.
3. A list of the directors and secretaries of the company containing particulars as per rule 3 has to be submitted.
4. Particulars regarding the opening and closing of a place of business in India on earlier occasions are also required to be submitted.
5. Declaration stating that no director or representative of a company in India is convicted or debarred from the formation of companies and management in India or abroad.

Section 381- Account of foreign companies

The foreign has to prepare a balance sheet and profit and loss account in the prescribed form containing the particulars prescribed under rule 4 which is to be annexed with the required documents mentioned under rule 4.

Section 382- Display of foreign companies

The name of a company and the country in which it is incorporated has to be exhibited outside its every place of business and office in business letters and notices in English and local language of the state in which such office is situated.

Section 383- Service on foreign company

The document can be served on the foreign company by electronic mode as per the new act.

Section 384

This section is related to the inspection of debentures, books of accounts, annual returns, and registration of charges.

Section 391

This section deals with the application of Sections 34 to 36 and Chapter XX.

Section 392- Punishment for contravention

The foreign company shall be punishable with a fine which shall not be less than 1 lakh rupees and which may extend to 3 lakh rupees in case of contravention of the provisions of this chapter. An additional fine of rupees 50,000/- shall be charged in case of continuing offense for every day after the first day during which the contravention continues.

Significant Actions or Changes which every Company needs to take Post Incorporation

• First meeting requirements as mentioned under sec. 173(1) are to have complied.
• The Bank Account should be there.
• Requirement of official address as per sec. 12(1) of the act is to comply.
• Requirement of fixation of names at all places of business by a company.
• Appointment of the first auditor by the board of directors, for the first year.
•  As per sec. 184(1) of the act every director shall disclose his interest in the company.
• Statutory registers shall be maintained by the company at its registered office.
• Share certificate to be issued to shareholder within 60 days from the date of incorporation
• Books of accounts to be maintained as per sec. 128.
• The requirement to file a disclosure stating that every subscriber has paid the amount due on shares.

Present Scenario in COVID[4]

The Ministry of corporate affairs reduces the compliance burden for companies. Some of the relaxations which are being provided are as follows-

1. Waiving of additional filing fees.
2. Interval time between two board meetings has been extended.
3. CARO 2020 is held to be applicable for all statutory audits commencing on or after 1^st April 2019. Corresponding to the financial year 2019-20. The applicability of CARO 2020 has been postponed for the financial year 2020-21. This will ultimately, reduce the burden of companies to tackle with more than 25 additional checks introduced under CARO 2020.
4. Ministry of corporate affairs has sorted out that it will not consider the non-happening of the meeting of independent directors as non-compliance because it is not possible to conduct a meeting physically in the lockdown phase. Therefore, the Ministry of Corporate Affairs has encouraged the companies to conduct the meeting through telephones or any other mode which they may deem to be fit.
5. Ministry of corporate affairs has extended the due date for deposit into deposit repayment reserve to 30^th June 2020 as this extension will control the liquidity crunch condition which is experienced by many companies who have accepted deposits.
6. The timeline for filing a declaration of commencement of business has been extended to 1 year from the date of incorporation.
7. MCA will not consider the non-fulfillment of the minimum stay by the resident director of the company as non-compliance for the year 2019-20 because of the prolonged ban on traveling across the countries.
8. MCA has extended the last date for compliance of deposit and investment to 30^th June 2020 with regard to the debentures that will mature during the financial year which will end on 31^st March 2021.

Conclusion

There has to be proper incorporation through legal means and after incorporation mandatory compliance after incorporation has to be followed. Otherwise, a company cannot function or work and all the activities carried by the firm will not be legally binding. The agreements entered into by the company will also be void if is it not incorporated or registered legally or if it does not comply with the post incorporation compliances.

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References:

[1] CS ATUL H. MEHTA, Incorporation of Companies, The Institute of Company Secretaries of India (Jun. 6, 2021, 10:00 AM), https://www.icsi.edu

[2] Post Incorporation, Corporate Compliances & Reporting in India, India Law Offices LLP (Jun. 7, 2021, 1:45 AM), https://www.indialawoffices.com

[3] CS Varun Kapoor, All about Foreign Companies Under Companies Act, 2013, Company Law – Articles (Jun. 8, 2021, 10:50 AM), https:// taxguru.in

[4] Covid 19: MCA Continues to Reduce Compliance Burden for Companies and LLPs, Meritas Law Firms Worldwide (Jun. 7, 2021, 1:47 PM), https://www.lexology.com