Incorporation of A Company- A Detailed Study of Companies Act 2013

The blog explains the intricacies within the Companies Act 2013 including the nitty-gritties of legal procedures and nuances of legal terminology while incorporating a company. The primary aim to incorporate a company is to create a separate legal entity which can function solely to be recognized as legally recognized business entity that can operate efficiently, safely and credibly. A keynote caselaw on this subject would be the Salomon v. Salomon & Co. Ltd. case wherein it set the precedent that a duly incorporated company has separate legal entity from its owners (shareholders) and they are not personally liable for company liabilities.

Incorporation of a company primarily depends on the type of company which is being incorporated. The distinction of companies on the basis of their features are:

Private Company:

1. A private company is incorporated under Section 2 (68) of the Companies Act 2013.

2. A private company has minimum 2 members as per the Companies Act 2013.

3. As per Section 3 (1), (a) of the Companies Act, 2013, it has a limit of 200 members as per the Companies Act 2013.

4. As per Section 12(1) name of company, includes mandatory suffix in the memorandum of association there it has to be registered under the term of “private limited”..

5. Under the norms of a private company the transfer of shares are restricted and public invitation is prohibited.

6. There is no minimum paid up capital as Companies (Amendment) Act removed minimum capital requirement for new companies.

7. As per Section 2 (68) of the Companies Act 2013 it is prohibited to issues prospectus.

8. A private company has minimum 2 directors.

Public Company

1. By definition, A company which is not a private company; can invite public

2. A public company is incorporated under Section 2 clause 71 of the Companies Act 2013.

3. A public company has minimum requirement of 7 members.

4. A public company does not have limit on the maximum number of members in its organisation.

5. Both public and private company have to abide by mandatory Section 96 of the Companies Act, conducting AGM or annual general meetings except One person companies.

6. It also must comply with Section 173 initiating board meetings.

7. A public company has minimum 3 directors.

After deciding the type of company, an individual/ group of persons decide to incorporate. The persons must obtain a Digital Signature Certificate issued by licensed Certifying Authority (CA) who has been granted a license to issue a digital signature certificate under Section 24 of the Indian IT-Act 2000. The above procedure is done in order to streamline the process of incorporating a company and make the process clearer for persons who are in a nascent stage of incorporating their business.

• The DSC is used for signing the SPICe+ forms which are later used to lay down the essentials while incorporating a company.

• The DSC is mandatory for all proposed directors and subscribers to MOA/AOA

• Applying for a name approval will be elemental in filing for the incorporation of a company and requires extensive proof work. Below are the steps for applying for a Company Name Approval:

• In order to file for a name approval the persons have to file SPICe+ part A in the MCA (Ministry of Corporate Affairs) portal.

• As per Companies (Incorporation) Rules, 2014, Rule 8 the name should not be identical to existing trademarks /company names and the name should not be objectionable to the extent that it uses prohibited words.

• The Registrar of Companies after due procedure and scrutiny will either approve the existing name or will suggest alternatives.

After due diligence, the name has to be unique and not match with any of the existing names in the trademark database. If in case, the ROC does approve the name of the company it is registered electronically with an intimation to the person who had filed for the name.

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Memorandum of Association

The MOA is the charter of the company. It defines the scope, powers, and external relations of the company. It is registered under the ROC and Sec 4; Companies Act 2013 governs the MOA. Drafting the Memorandum of Association and Articles of Association sets the essential nuances of the company being incorporated as it contains a vast majority of essentials. It primarily contains:

• Company name

• State of registered office

• Objects (Main, Ancillary)

• Liability of members

• Capital clause (authorized & paid-up)

The MOA is a public document that is open for inspection by the general public. It clearly sets the scope for the dealings of a business and acts beyond the MOA are considered to be ultra vires- acting or done beyond one's legal power or authority. The Memorandum of Association must be signed by at least two subscribers in the case of a private limited company and at least seven subscribers in the case of a public limited company. In case a change is to be made in the memorandum, it has to be notified to the ROC and a special resolution has to be drafted in consequence.

Articles of Association

The AOA is considered to be the internal rulebook of a company. It governs management, administration, and relations between members and directors. Sec 5, Companies Act 2013 governs the AOA. Contents of the AOA contain a vast variety like:

• Share Capital & Variation of Rights 

• Issue & Transfer of Shares 

• Directors: Appointment, Powers, Removal 

• Board Meetings & General Meetings 

• Dividends & Reserves

• Borrowing Powers 

• Accounts & Audit 

• Winding-up 

The MOA has subsequent requirements as well:

• Must be signed by all subscribers (people taking shares)

• Each subscriber must take at least 1 share

• Witnessed by Advocate / Professional

• Attach ID proof & address proof of subscribers

After forming the MOA and AOA file incorporation forms are needed to be attached along with SPICe+. These forms are primarily needed by the MCA and ROC to certify that people incorporating the company are legitimate with strong legal foundation regarding MOA and AOA. The following forms are needed to be attached along with SPICe+:

·       MOA (e-MOA INC-33)

·       AOA (e-AOA INC-34)

·       Declaration by Directors & Subscribers (INC-9)

·       Proof of Registered Office

·       Identity & Address Proof of Directors & Subscribers

After filing of forms, fees and stamp duty has to be paid in the MCA portal as per the authorised capital of the firm. Upon increase of authorised share capital, the company is required to file Form SH-7 with the Registrar of Companies and pay ROC fees. The fees are calculated on a slab which depends on the amount of increase in authorised capital and is regulated by the Companies (Registration Offices and Fees) Rules, 2014,.

After genuine due diligence performed by the ROC, a certificate of incorporation is issued which contains the Company Name, CIN (Corporate Identification Number) and Date of Incorporation. The company can only be treated as a separate legal entity after a certificate of incorporation has been issued already.

Documents Required for Incorporation

A. Identity Proof (for Directors & Subscribers)

• PAN card (mandatory)

• Passport / Voter ID / Driving license (if PAN not available for foreign nationals)

B. Address Proof (for Directors & Subscribers)

• Passport / Voter ID / Driving License / Utility Bill (not older than 2 months)

C. Proof of Registered Office

• Ownership proof: Sale deed / rent agreement

• NOC from owner (if rented)

• Utility bill (electricity / water / telephone)

D. MOA & AOA

• Electronically signed forms

• Signed by subscribers

E. DSC (Digital Signature Certificate)

• For all directors

• Mandatory for SPICe+ submission

F. Declaration & Consent Forms

• INC-9: Declaration by directors

• DIR-2: Consent to act as director

Practically, Private companies are easier and faster to incorporate. However Public Companies require stricter disclosures and more compliances with due governance right from incorporation like in cases of IPO (Initial Public Offerings). In cases of Public Companies, it may be the case that they are opting for being listed on the stock exchange.

Importance of Companies Act 2013 – Compliances and Regulations

Recent developments in the MCA portal and constant augmentation in the streamlining process of incorporation of a company has resulted in greater developments in efficiency and reliability of the filing procedure, making way for speedier applications and subsequent approvals. Developments such as e-MOA and e-AOA have significantly streamlined and facilitated applications and filings under the Companies Act, 2013.The companies act lays down the foundational building blocks for the incorporation of a company and portrays how compliance plays an essential role in determining the legal validity of a separate legal entity.

In contemporary corporate ecosystem, where businesses operate in different cross border forms, bridging gaps between physical and digital forums- compliances play an essential role in the alignment of corporate practices to maintain uniformity of action in both macro and micro environments. Procedures relating to digital filings and online methods of disclosure show the legislature’s intent to adapt with the fast paced corporate world with evolving realities. These efforts ensure that compliance is a need of both domestic and international firms who are transacting for services.

By mandating these preventive frameworks amongst companies, these regulations serve as code of conduct  aimed at reducing corporate misconduct before it arises. By instilling accountability mechanisms within companies  it fosters a culture of ethical decision making and responsible corporate citizenship leading to sustainable business growth.

These guidelines and compliances are set in order to mitigate upcoming disputes which may arise due to unprecedented circumstances in the business environment. These serve as guardrails for businesses as they help function with proper dispute resolution mechanisms and explicit bylaws governing the internal mandate of the company. Documents such as the Articles of Association set clear regulations for employees such that behavioural/ professional inconsistencies can be warded off. Without these essential drafts like the MOA and AOA, the company can face several legal lacunae which can later be exploited by personnel. Moreover in case of issue and transfer of shares, high scrutiny and surveillance is required in order to maintain financial discipline and investor confidence. Steps which may seem highly procedural and trivial in nature, like filing of annual returns and financial statements with ROC, can contribute to great depths in company law further promoting transparency in the profession. Statutory audits and maintenance of books of accounts enhance public trust and regulatory oversight providing mechanisms for inspection, inquiry and investigation of suspected organisations. Drawing from marketing concepts like the product life cycle, The Companies Act, 2013 is essential as it governs the life cycle of a company from the very introduction stage of a company to its decline, it scrutinizes each and every arm of a company for regulatory compliance and legitimate dealings.

Conclusion

the distinctions between private and public company largely rely on their features and the nature of the company which is being incorporated. These distinctions are evidently important and are necessary to take in cognisance while incorporation. The procedures for incorporation may seem extensive but are streamlined with the help of a single MCA portal which helps file SPICe+ forms (Part A and Part B ) with ease. In summation, the procedures for incorporating a company may seem extensive however they are easy to follow once understood thoroughly, behind these procedures are the very instruments that hold our laws in place ensuring credibility and transparency.

Author: Sujay Kumar Maitra, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

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