Procedure of Incorporation | Company Law - CLAT PG PDF Download

Companies Act of 1956

The Companies Act of 1956 provides the legal framework for establishing both public and private companies in India. The most common form of incorporation is the limited company, while unlimited companies are rare. The process of forming a company involves registering the Memorandum and Articles of Association with the State Registrar of Companies in the respective state where the company's main office will be located.

Branch Offices for Foreign Companies in India

Foreign companies engaged in manufacturing and trading activities abroad are allowed by the Reserve Bank of India (RBI) to open branch offices in India for specific purposes, including:

• Representing the parent company or other foreign companies in various matters in India, such as acting as buying or selling agents.
• Conducting research work on behalf of the parent company, with the condition that the results of the research are shared with Indian companies.
• Engaging in export and import trading activities.
• Facilitating potential technical and financial collaborations between Indian companies and overseas companies.

Application Process for Branch, Project, or Liaison Offices

The application process for opening a branch, project office, or liaison office in India involves the following steps:

• Submit Form FNC-5 to the Reserve Bank of India (RBI)
• For opening a project or site office, application can be made on Form FNC-10 to the regional offices of the RBI.
• A foreign investor does not need a local partner and can hold full equity of the company. The portion of equity not held by the foreign investor can be offered to the public.

Approval of Name

• The first step in forming a company is getting the name approved by the Registrar of Companies (ROC) in the State or Union Territory where the company will have its Registered Office.
• The name approval comes with certain conditions, such as:
  • There should not be an existing company with the same name.
  • For a private company, the name must end with "Private Ltd." For a public company, it must end with "Limited."
• The application should provide at least four preferred names for the company.
• The ROC typically informs the applicant within seven days whether any of the proposed names are available.
• Once a name is approved, it is valid for six months, during which the Memorandum of Association, Articles of Association, and other documents must be filed.
• If unable to file within six months, an application for name renewal can be made by paying additional fees.
• After name approval, it usually takes about two to three weeks to incorporate the company, depending on the registration location.

Memorandum and Articles

• The Memorandum of Association and Articles of Association are crucial documents submitted to the ROC for company incorporation.
• The Memorandum of Association outlines the company's constitution, including its objectives, scope of activities, and its relationship with the outside world.
• The Articles of Association contain the internal rules and regulations for managing the company's affairs.
• The ROC issues a certificate of incorporation after receiving the necessary documents and registration fee, which varies based on the company's share capital.
• A private company can start its business upon receiving the certificate of incorporation.
• A public company can invite the public to subscribe to its share capital by issuing a prospectus, which must be filed with the ROC before public issuance.
• If the company opts for private capital, it can file a "Statement in Lieu of Prospectus" with the ROC.
• Once these requirements are met, the ROC issues a Certificate of Commencement of Business to the public company, allowing it to start business immediately.

Miscellaneous Documents

• Along with the Memorandum and Articles of Association, the following documents/forms are filed with the ROC:
  • Declaration of compliance, duly stamped
  • Notice of the situation of the registered office of the company
  • Particulars of Directors, Manager, or Secretary
  • Authority executed on non-judicial stamp paper, authorizing one of the subscribers to file documents and make corrections
  • The ROC's letter indicating the availability of the name
• Filing fees depend on the authorized capital of the company.

Tax Registration

Tax Identification Card and Number

• Businesses liable for income tax must obtain a tax identification card and number, known as Permanent Account Number (PAN), from the Revenue Department.

Tax Deduction Account Number (TAN)

• Businesses required to withhold tax must obtain a Tax Deduction Account Number (TAN).

Documentation Requirements

• PAN and TAN must be indicated on all returns, documents, and correspondence filed with the Revenue Department.
• PAN is also required in various documents such as:
  • Sale or purchase of immovable property (exceeding Rs. five lakh)
  • Sale or purchase of a motor vehicle
  • Time deposit (exceeding Rs. 5 lakh)
  • Contract for sale or purchase of securities (exceeding Rs. 10 lakh)

Rules Applicable

• Companies (Central Governments') General Rules and Forms, 1956
• Filing Registering/Approving Authority

Enclosures

• Document evidencing payment of fee
• Memorandum and Articles of Association
• Copy of agreement (if any) with proposed managing or whole-time director or manager
• Form 18
• Form 32 (except for section 25 company)
• Form 29 (only in case of public companies)
• Power of Attorney from subscribers
• Letter from Registrar of Companies making names available
• No objection letters from directors/promoters
• Requisite fees either in cash or demand draft

Fees

• Fee payable depends on the nominal capital of the company to be registered.
• Modes of payment:
  • Cash/postal order (up to Rs. 501)
  • Demand draft favoring Registrar of Companies/Treasury Challan payable into specified branches of Punjab National Bank

Time-Limit

• Submission should be done before incorporation or within 6 months of the name being made available.

Top Requirements

• The declaration must be signed by:
  • An advocate of Supreme Court or High Court
  • An attorney or pleader entitled to appear before the High Court
  • A secretary or chartered accountant in whole-time practice in India engaged in the formation of the proposed company
  • A person named in the articles as director, manager, or secretary
• The Registrar of Companies must ensure compliance with section 33(1) and (2) requirements, including number of subscribers, lawful nature of objects, and name compliance.
• Documents should be duly stamped, and compliance with other laws should be met.
• Any document defects must be rectified by all subscribers or their attorney, or by any one subscriber holding power of attorney on behalf of others.
• The form should be presented to the Registrar of Companies within three months from the date of the letter allowing the name.
• The declaration should be on non-judicial stamp paper of requisite value, purchased in the name of the person signing the declaration.
• All companies, public or private, must provide this declaration at the time of registration.
• The place of Registration No. of the company should be filled as New Company.
• The Registrar of Companies will accept computer laser printed documents for registration if they are neat, legible, and comply with other Act requirements.
• If a memorandum of association executant is illiterate, a thumb impression or mark should be provided and described as such by the subscriber or person writing for him.
• An agent may sign a memorandum on behalf of a subscriber if authorized by power of attorney. In case of an illiterate subscriber, the thumb impression or mark should be attested by the person writing for him, and the person attesting should endorse that it has been read and explained to the subscriber.
• Zerox copies of the memorandum and articles of association will not be accepted for registration purposes.
• The declaration should be presented at the counter of the Registrar of Companies office by the person signing it or by his bearer.

Managerial Remuneration

Eligibility for Managing Director

• A person appointed as the Managing Director of a company must be a resident of India. Non-residents need to obtain an Employment Visa from the Indian mission abroad at the time of their appointment.

Remuneration Limits

• Private Companies: Private companies can pay any remuneration to their directors without restrictions.
• Public Companies: Public companies have specified limits for director remuneration.

Managerial Remuneration in Public Companies

• In cases of absence or inadequacy of net profits, managerial remuneration is limited to amounts ranging from Rs 75,000 to Rs 2,00,000 per month, depending on the company's effective capital.
• For expatriate managerial personnel, certain perquisites such as children's education allowance, holiday passage money, and leave travel concession do not count towards the remuneration ceiling.

Remuneration from Multiple Companies

• If a managerial person holds positions in two companies, they can draw remuneration from one or both companies, provided the total does not exceed the higher maximum limit applicable to any one of the companies.

Filing Requirements

Documents should be filed with the Registrar of Companies in the state where the company is to be registered.

• A printed copy of the Memorandum and Articles of Association of the proposed company, along with a declaration stamped with the required adhesive stamps.
• Subscribers to the Memorandum should write their full name, father's or husband's full name, address, occupation, and number of equity shares taken, and then sign in the designated column.
• At the end of the Articles of Association, each subscriber should write their full name, father's name, address, and occupation in their own handwriting.
• The signatures of the subscribers to the Memorandum and Articles of Association should be witnessed by one person, preferably the person representing the subscribers.
• Under the column 'Total number of equity shares,' write the total number of shares taken by the subscribers (e.g., 20 shares).
• Include the date (e.g., 5th August 1996) and place (e.g., New Delhi).
• Along with the stamped copy, submit one spare copy each of the Memorandum and Articles of Association.
• Original copy of the letter from the Registrar of Companies confirming the availability of the company name.
• Form No. 18 - Details of the registered office of the proposed company.
• Form No. 29 - Consent to act as a director, etc. (not required for private companies and wholly owned government companies).
• Form No. 32 (in duplicate) - Details of proposed directors, manager, or secretary.
• Power of attorney typed on non-judicial stamp paper of the required value, purchased in the name of the person signing the authority.
• No objection letter from individuals listed as promoters/directors in Form No. 1-A but not interested at a later stage should be obtained and filed with the Registrar during registration.
• Any agreements the company plans to enter into with individuals for appointments as managing or whole-time director or manager should also be filed.

Fee Payable

When paying the fee for company registration, it should be done through cash, a bank draft, or a pay order treasury challan. The payment must be drawn in the name of the Registrar of Companies of the respective state where the company is proposed to be registered, as per Schedule X.

Reporting Requirements Annual Accounts

Indian company law does not specify the exact books of accounts that a company must maintain. However, it mandates that these accounts should be kept on an accrual basis and follow the double-entry system of accounting. The accounts should be sufficient to provide a true and fair view of the company's financial position.

Proper Books of Account

Every company is required to maintain proper books of account regarding the following:

• All sums of money received and expended, along with the related matters.
• All sales and purchases of goods by the company.
• The assets and liabilities of the company.
• For companies engaged in manufacturing, processing, mining, etc., specific details related to the utilization of material, labor, or other cost items.

First Annual Accounts

The first annual accounts of a newly incorporated company should cover the period from the date of incorporation until a day not exceeding 9 months before the Annual General Meeting (AGM) date. Subsequent accounts should be prepared from the date of the last accounts until a day not exceeding 6 months before the AGM date, with certain exceptions. The accounts must relate to a financial year of 12 months but should not exceed 15 months. An extension of up to 18 months is possible with prior permission from the Registrar of Companies (ROC).

Filing Annual Accounts

Annual accounts must be filed with the ROC within 30 days of the AGM date. If the AGM is not held, the accounts should be filed within 30 days of the last date on which the AGM was required to be held.

Books of Accounts Maintenance

Every company is obligated to maintain proper books of account regarding:

• All sums of money received and expended.
• All sales and purchases of goods.
• The assets and liabilities of the company.

The Central Government may also mandate specific additional particulars for certain classes of companies. Books of account for the past eight years, along with supporting vouchers, must be preserved in good order.

Financial Statements Compliance

Every profit and loss account and balance sheet (collectively referred to as financial statements) must adhere to the accounting standards set by the Institute of Chartered Accountants of India. Any deviations from these standards, including reasons and financial effects, should be disclosed in the financial statements.

Management Responsibility

The management is responsible for preparing financial statements on a going concern basis. This includes selecting and consistently applying appropriate accounting policies, implementing applicable accounting standards, and providing explanations for any material departures from these standards. Additionally, the management is responsible for making reasonable and prudent judgments and estimates to present a true and fair view of the company's financial position and performance at the end of the financial year.

Annual Return

• Every company with share capital must file an annual return with the Registrar of Companies (ROC) within 60 days of holding its Annual General Meeting (AGM).
• If the AGM is not held, the return should be filed within 60 days of the last date by which the AGM was supposed to be held.

Certain Accounting Related Issues

Depreciation

• Indian company law allows different depreciation rates based on asset classes.
• Depreciation can be calculated using either the Straight-Line Method or the Reducing Balance Method.
• The law sets minimum depreciation rates, but companies can use higher rates if justified by technological evaluations.
• Companies must disclose depreciation methods and rates in their annual accounts.

Dividend

• There is no limit on the rate of dividend that can be declared.
• Dividends can only be paid out of current year profits after making adequate provisions for depreciation.
• Dividends may also be distributed from accumulated profits.

Repatriation of Profits

• Companies must retain a maximum of 10% of profits as reserves before declaring dividends.
• These reserves can be converted into equity through bonus shares.
• Once investment approval is granted, dividends are freely repatriable.

Imposition of Taxes

• Domestic companies are taxed at 35.875% on taxable income, while foreign companies are taxed at 41%.
• If the income tax liability is less than 7.5% of book profits, a Minimum Alternate Tax of 7.6875% applies.
• Domestic companies pay a dividend distribution tax of 12.8125% on distributed dividends.
• Companies must withhold tax on various payments, including salaries, interest, and professional fees, and from payments to non-residents at the lower of domestic law rates or tax treaty rates.

Penalty

• Imprisonment for up to two years and a fine.
• Liability for defaults falls on the person responsible and the signatory of the declaration.