Compliances for Start-Ups under Companies Act

June 08,2016

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Sanjay R. Buch (Partner, Crawford Bayley and Co.)

1. Introduction
A. What is Startup India Scheme?

Startup India is an initiative of the Government of India. This initiative is designed to enable the growth of start-ups, generate employment opportunities and promote innovation.

B. Overview of the Startup India Plan

The Startup India Plan contains the following action points-

Compliance Regime Based on Self Certification
Start-up India hub
Rolling out of Mobile app and Portal
Legal Support and Fast Tracking Patent Examination at Lower Costs
Relaxed norms for Public Procurement for Start-ups.
Faster Exit for start-ups
Providing Funding Support for development and growth of innovation driven enterprises
Credit guarantee fund for Start ups
Tax exemptions on Capital Gains
Tax exemption to Start ups for 3 years
Tax exemptions on Investments above Fair Market Value
Organising Start up Fests for showcasing innovation and providing a collaboration platform
Launch of Atal Innovation Mission (AIM) with Self Employment and Talent Utilisation (SETU) Program.
Harnessing Private Sector Expertise for Incubatory Setup
Building innovation Centres at National Universities
Starting up of 7 New Research Parks based on the Research Park setup at IIT Madras
Promoting Start-ups in the Biotechnology Sector
Launching of Innovation Focussed Programs for Students
Annual Incubator Grand Challenge

Key definitions- a) start up b) entity c) business d) eligible start up

Startup means:

An entity, incorporated or registered in India,
Not older than five years,
Annual turnover not exceeding INR 25 crore in any preceding financial year,
- Working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
- such entity is not formed by splitting up, or reconstruction, of a business already in existence.
- an entity shall cease to be a Start-up if its turnover for the previous financial years has exceeded INR 25 crore or it has completed 5 years from the date of incorporation/ registration.
- A Start-up shall be eligible for tax benefits only after it has obtained certification from the Inter-Ministerial Board, setup for such purpose.

Meaning of the term an “Entity”

Private Limited Company (under the Companies Act, 2013) or a
Registered Partnership Firm (under The Indian Partnership Act, 1932) or a
Limited Liability Partnership (under The Limited Liability Partnership Act, 2008)

Meaning of the term “Business”

If it aims to develop and commercialize:

A new product or service or process; or
A significantly improved existing product or service or process that will create or add value for customers or workflow.
The mere act of developing
- products or services or processes which do not have potential for commercialization; or
- undifferentiated products or services or processes; or
- products or services or processes with no or limited incremental value for customers or workflow would not be covered under this definition.

Concept of an eligible startup

In order for a “Startup” to be considered eligible, the Start-up should

Be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an Incubator established in a post-graduate college in India; or
Be supported by an incubator which is funded (in relation to the project) from GoI as part of any specified scheme to promote innovation; or
Be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an Incubator recognized by GoI; or
Be funded by an Incubation Fund/Angel Fund/ Private Equity Fund/ Accelerator/Angel Network duly registered with SEBI* that endorses innovative nature of the business; or
Be funded by Government of India as part of any specified scheme to promote innovation; or
Have a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted.
DIPP may prescribe a ‘negative’ list of funds which are not eligible for this initiative)

Provisions pertaining to private limited companies

Since the term entity in the Startup Action Plan, inter alia, means a private limited company under Companies Act, 2013 (“Act”) it is pertinent to examine the benefits of incorporating a private limited company. Further, the Act also recognises One Person Company and small company as forms of private companies.

Definition of a private limited company

The term private company has been defined in section 2(68) of the Act. The definition has been reproduced herein below-

(68) “private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles,—

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its members to two hundred:

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member.

Provided further that—

(A) persons who are in the employment of the company; and

(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the company;

Thus, from the abovementioned definition it can be seen that-

A private company’s articles of association restricts the transfer its shares.
The maximum number of members a private company can have is 200.
No initial capital is required to incorporate a private company

Section2(71) of the Act defines the term public company. The proviso to the said section states that that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles. In other words, private company which is a subsidiary of a public company has been put in the same position as a public company.

Exemptions and privileges which are made available to private companies under the Act are as follows-

Section/Rule	Description	Comments
CHAPTER I AND II PRELIMINARY AND INCORPORATION OF THE COMPANY
3 (1)(b)	Minimum number of members 2 members	If the number of members falls below 2, neither unlimited liability for continuing members nor compulsory winding up will follow as sections 45 and 433(d) of the 1956 Act are omitted by the 2013 Act. However, section 3A, proposed to be inserted by Companies (Amendment ) Bill, 2016, states that if at any time the number of members of a company is reduced, in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognisant of the fact that it is carrying on business with less than two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor.
14 (1)(a)	Right to alter articles Subject to the provisions of this Act and to the conditions contained in its memorandum, if any, the company may by a special resolution alter its articles including alterations having the effect of conversion of a private company into a public company. Note: However, alteration of articles to incorporate entrenchment provisions” requires that alteration should be agreed to by all the members of the company. For this alteration, special resolution will not suffice [section 5(4)].
CHAPTER III- PROPECTUS AND ALLOTTMENT OF SECURITIES

39 (1) 39 (2)	No requirement of minimum subscription The restriction of “no allotment of securities unless minimum subscription is received” is not applicable to private companies. No requirement of minimum application money on securities The requirement of minimum 5% of nominal amount of every security payable on application is applicable to public offers and not to private placements.	Provisions of Chapter III insofar as they relate to public offer of securities, do not apply to private companies.
CHAPTER IV-SHARE CAPITAL AND DEBENTURES
67 (2)	Not barred from giving financial assistance to purchase its shares/shares of its holding company A private company is not barred from giving any financial assistance for the purchase or subscription by any person for any shares in the company or in its holding company. (Such financial assistance may be by means of a loan, guarantee, provision of security or otherwise. Such financial assistance may be direct or indirect.
CHAPTER VII- MANAGEMENT AND ADMINISTRATION
92 (2) / Rule 11 (2) of the Companies Management and Administration	No need for compulsory recertification of annual return by company secretary in practice if paid-up capital less than ₹ 10 crores and/or turnover of company is less than ₹ 50 crores The annual return, filed by a listed company or a company having paid-up share capital of ten crore rupees or more or turnover of fifty crore rupees or more, shall be certified by a Company Secretary in practice and the certificate shall be in form No. MGT.8.
93	No need to file with ROC return of changes in the number of shares held by promoters and top ten shareholders
103	Quorum for General Meetings – Minimum two members personally present Unless the articles of the company provide for a larger number, two members personally present shall be the quorum for a general meeting.
108/ Rule 20 (1) of the Companies (Management and Administration) Rules 2014	Not required to provide to its members facility of voting through electronic means .
120/ Rule 27 (1) of the Companies (Management and Administration) Rules 2014	Not required to maintain records in electronic form	A private company may choose to keep its records in electronic form. However, this requirement is not mandatory.
121	Not required to file report on AGM with ROC
CHAPTER IX-ACCOUNTS OF COMPANIES
134 (3) (p)	The reports of the Board of Directors need not contain a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors.
134 (5) (e)	Directors Responsibility Statement need not contain a statement of responsibility regarding internal controls.

136 (1)	Not required to place its financial statements including consolidated financial statements, if any, on its website
138/ Rule 13 of the Companies (Accounts) Rules 2014	Mandatory Internal Audit provisions not applicable to private companies unless turnover or outstanding loans criteria is satisfied. Every private company having: Turnover of two hundred crore rupees or more during the preceding financial year; or Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year An existing company covered under any of the above criteria shall comply with the requirements of section 138 and this rule within six months of commencement of such section. The internal auditor may or may not be an employee of the company The term “chartered accountant” shall mean a “chartered accountant” whether in practice or not
CHAPTER X-AUDIT AND AUDITORS
139 (2)/ Rule 5 of Companies (Audit and Auditors) Rules 2014	Requirement of compulsory rotation of auditors shall not apply unless paid up share capital or outstanding loans or public deposits criteria is satisfied Compulsory rotation of auditors shall apply only to listed companies and to companies belonging to such class or classes of companies as may be prescribed. The class or classes include All private limited companies having paid-up share capital of rupees twenty crore or more; All companies having paid up share capital of below threshold limit mentioned above, but having public borrowings from financial institutions, banks or public deposits of rupees 50 crore or more.	If the paid-up share capital of the company is less than twenty crore rupees, no requirement for rotation of auditors.
CHAPTER XI- APPOINTMENT AND QUALIFICATIONS OF DIRECTORS
149 (1) (a)	Minimum 2 directors A private company needs to have minimum two directors only.	.
149 (1), 2^nd proviso, Rule 3 of the Companies (Appointment and Qualification of Directors) Rules 2014	Not required to appoint at least one woman director
149 (4)	Not required to appoint independent directors	Only listed companies and certain public companies are required to appoint independent directors on their Boards.
152 (6)	Directors not liable to retire by rotation Directors of a private company need not retire by rotation.	Articles of Association if a private company may independently contain a provision for retirement if directors by rotation.
164 (3)	Additional grounds in articles for vacation of office of directors A private company may, by its articles, provide for any disqualifications for appointment as a director in addition to those specified in section 164.
167 (4)	Additional grounds in articles for disqualifications of directors A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to those specified in section 164.
CHAPTER XII- MEETINGS OF BOARDS AND POWERS
177 (1) Rule 6 of the Companies (Meetings of Board and its Powers) Rules 2014	Not required to constitute an audit committee An audit committee is required to be constituted only by Every listed company; All public companies with a paid up capital of ten crore rupees or more; All public companies having turnover of 100 crore rupees or more; All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more. The paid up share capital or turnover or outstanding loans or borrowings or debentures or deposits, as the case may be, as existing on the date of last audited Financial Statements shall be taken into account for the above purposes.	PLEASE NOTE THAT THE COMPANY WILL HAVE TO ESTABLISH A VIGIL MECHNISM IF ITS BORROWINGS EXCEED FIFTY CRORE RUPEES
178 (1) Rule 6 of the Companies (Meetings of Board and its Powers) Rules 2014	Not required to constitute a Nomination and Remuneration Committee	.
190 (4)	No requirement of maintaining contracts of service with Managing Director/ whole time director. Provisions of section 190 relating to keeping contract of service with a managing or whole time director or where such contract is not in writing, a written memorandum setting out its terms and inspection thereof by a member of the company are not applicable to a private company.
CHAPTER XIII- APPOINTMENT AND REMUNERATION
197 (1), 197(12)	Overall maximum managerial remuneration limits not applicable to private companies. Not required to disclose in the Board’s report the ratio of the remuneration of each director to the median employee’s remuneration.	The procedure to determine managerial remuneration should be ideally stated in the Articles of the company
203 Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014	Not required to appoint a Key Managerial Personnel Every listed company and every other public company having a paid up share capital of ten crore rupees or more shall have whole-time key managerial personnel.	A private company having a paid up share capital of five crore rupees or more is required to appoint a whole time Company Secretary.
204 (1) Rule 9 (1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014	Mandatory secretarial audit requirements not applicable

Further exemptions granted to private limited companies.

In exercise of the powers conferred by Section 462, the Ministry of Corporate Affairs by its notification dated 5^th June, 2015 has exempted private companies from the applicability of certain provisions a table showing the said exemptions is presented herein below:

S. No.	Chapter/Section number/sub-section(s) in the Companies Act, 2013	Description	Exceptions/ Modifications/Adaptions
(1)	(2)	(3)	(4)
1.	Chapter-I, sub-clause (viii) of Clause (76) of Section 2.	Section 2(76) of the Act defines the term related party. Any company which is— (A) a holding, subsidiary or an associate company of such company; or (B) a subsidiary of a holding company to which it is also a subsidiary; Is a related party with reference to a company	Shall not apply with respect to Section 188. Section188 deals with contracts or arrangements with related parties. Thus, the holding, subsidiary or an associate company or a subsidiary company of a holding company of which a private company is also a subsidiary, shall not be considered to be a related party for the purpose of complying with Section 188 of the Act.
2.	Chapter IV, Section 43 and Section 47.	Section 43 deals with the kinds of share capital which a company may have, i.e. equity shares, shares with differential voting rights and preference shares. Section 47 deals with the voting rights of the members	Shall not apply where memorandum or articles of association of the private company so provides. Thus, this exemption has, inter alia, the following implications- a) Private company need not follow the procedure for issue of shares carrying differential voting rights, b) A member of a private company may not have voting rights in proportion to his share in the paid up share capital of the company.
3.	Chapter IV, sub-clause (i) of clause (a) of sub-section (1) and sub-section (2) of Section 62.	Section 62 deals with the further issue of share capital. Section 62(1) (a) of the Act deals with the notice of offer to be sent to the members of the company. Sub-clause (i) of clause (a) of sub-section (1) this deals with the time period for which the offer of shares to the holders of equity shares of the company shall be open i.e a period not less than 15 days and not exceeding 30 days. Section 62 (2 )of the act states that the notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be despatched through registered post or speed post or through electronic mode to all the existing shareholders at least three days before the opening of the issue.	Shall apply with following modifications:- In clause(a), in sub-clause(i), the following proviso shall be inserted, namely:- Provided that notwithstanding anything contained in this sub-clause and sub-section(2) of this section, in case ninety per cent of the members of a private company have given their consent in writing or in electronic mode, the periods lesser than those specified in the said sub-clause or sub-section shall apply.
4.	Chapter IV, clause (b) of sub-section (1) of Section 62.	In the event shares are offered to employees under a scheme of employees’ stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed.	A private company is not required to pass a special resolution. It is only required to pass a general resolution.
5.	Chapter IV, section 67.	Section 67 (1)of the act states that no company limited by shares or by guarantee and having a share capital shall have power to buy its own shares unless the consequent reduction of share capital is effected under the provisions of this Act.	Shall not apply to private companies- (a). in whose share capital no other body corporate has invested any money; (b). if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice its paid up share capital or fifty crore rupees, whichever is lower; and (c). such a company is not in default in repayment of such borrowings subsisting at the time of making transactions under this section.
6.	Chapter V, clauses (a) to (e) of sub-section (2) of Section 73.	Section 73(2) lists out the procedure to be followed by a company for accepting deposits from its members.	Shall not apply to a private company which accepts from its members monies not exceeding one hundred per cent of aggregate of the paid up share capital and free reserves, and such company shall file the details of monies so accepted to the Registrar in such manner as may be specified.
7.	Chapter VII, sections 101 to 107 and section 109.	Section 101: Notice of Meeting. Section 102: statement to be annexed to notice. Section 103: Quorum for meetings. Section 104: chairman of meetings. Section 105: Proxies. Section 106: Restriction on voting rights. Section 107: Voting by show of hands. Section 109: Demand for poll.	Shall apply unless otherwise specified in respective sections or the articles of the company provide otherwise.
8.	Chapter VII, Clause (g) of sub-section (3) of section 117.	Section 117 sets out the categories of resolutions and agreements to be filed by a company with the Registrar of Companies. Clause (g) of sub-section (3) of section 117 states that resolutions passed in pursuance of sub-section (3) of Section179 needs to be filed.	Shall not apply.
9.	Chapter X, Clause (g) of sub-section (3) of section 141.	Section 141 provides for the eligibility, qualifications and disqualifications of auditors. Clause (g) of sub-section (3) of section 141 states a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies.	Shall apply with the modification that the words “other than one person companies, dormant companies, small companies and private companies having paid up share capital less than one hundred crore rupees” shall be inserted after the words “twenty companies”.
10.	Chapter XI, section 160.	Section 160 deals with the rights of persons other than retiring directors to stand for directorship.	Shall not apply.
11.	Chapter XI, section 162.	Section 162 provides that at a general meeting of a company, a motion for the appointment of two or more persons as directors by a single resolution shall not be moved unless a proposal to move such a motion has first been agreed to at the meeting without any vote being cast against it.	Shall not apply.
12.	Chapter XII, section 180.	Section 180 provides for the powers of the Board of Directors of a company to be exercised only with the consent of the company by a special resolution.	Shall not apply.
13.	Chapter XII, sub-section (2) of section 184.	Section 184(2) )states that every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into— (a) with a body corporate in which such director or such director in association with any other director, holds more than two per cent. shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or (b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be, shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting: However, where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested.	Shall apply with the exception that the interested director may participate in such meeting after disclosure of his interest.
14.	Chapter XII, section 185.	Section 185 provides the circumstances and manner in which a company shall advance any loan to any of its directors or to any other person in whom he is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.	Shall not apply to a private company- (a). in whose share capital no other body corporate has invested any money; (b). if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and (c). such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section.
15.	Chapter XII, second proviso to sub-section (1) of Section 188.	Section 188 stipulates the manner in which contracts or arrangements by a company with related parties shall be made and disclosed. The second proviso to sub-section (1) of Section188 states that no member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.	Shall not apply. This implies that a related party can vote on a resolution for the approval of related party transactions, in case of a private company.
16.	Chapter XIII, sub-sections (4) and (5) of section 196.	Section 196(4) provides for the manner in which, a managing director, whole-time director or manager shall be appointed by a company. Sub section (5) of section 196 invalidates the acts of managing director, whole-time director or manager whose appointment is not approved by the company at a general meeting.	Shall not apply.

Key compliances by Private Limited Companies

Even though the Act has specified many exemptions, the following critical compliances are required to be taken into consideration for private companies-

Private company cannot make ‘public offer’ of securities.
Issue of Global Depository Receipts by private companies is not allowed.
Private company cannot invite or accept public deposits.
Corporate Social Responsibility (CSR) obligations include mandatory CSR spends in each financial year of at least 2% of average net profit during 3 preceding financial years applies only to company whose net worth is ₹ 500 crores or more or turnover is ₹ 1000 crores or net profit is ₹ 5 crores or more. Thus, an eligible start up may have to comply with provisions pertaining to CSR in the Act if its net profit exceeds Rs. 5 Crores.
Provisions pertaining to loans to directors and inter corporate loans apply to private companies.
Procedures specified in the Act for issue of sweat equity shares, and bonus shares are required to be followed by private companies as well.

Definition of a One Person Company

Section 2(62) of the act defines a One Person Company as follows-

““One Person Company” means a company which has only one person as a member. “

Key provisions and exemptions applicable to One Person Company (OPC)

1. All exemptions applicable to private companies applicable to One Person Company.

2. Conditions for incorporating a One Person Company

A) Only a natural person can incorporate an OPC.

B) The person incorporating an OPC must be a resident in India, i.e. a person who has stayed in India for a period not less than 182 days during the immediately preceding one calendar year.

C) No person shall be eligible to incorporate more than one OPC or become a nominee in more than one OPC.

D) Minor cannot be a member of an OPC or hold beneficial interest in the share of an OPC.

When the paid up share capital of an OPC exceeds 50 Lakhs rupees or its average annual turnover during the relevant period exceeds 2 crore rupees, it shall cease to be entitled to continue as an OPC.
The Memorandum of Association of an OPC shall state the name of the person who shall become a member in the event of the subscriber. Nominee’s prior consent should be obtained in Form INC 3 (nominee consent form).
An OPC cannot carry out Non-Banking Financial Investment Activities including investment in securities of any body corporate.
No such company can convert voluntarily into any kind of company unless 2 years have expired from the date of incorporation of OPC except threshold limit (paid up share capital) is increased beyond 50 lakhs rupees or its average turnover during the relevant period exceeds 2 crore rupees. the OPC shall be required to convert itself within 6 months from the date on which its paid up capital is increased beyond 50 Lakhs rupees or the last day of the relevant period during which its average annual turnover exceeds 2 crore rupees into a private company or a public company.
An OPC cannot be registered under Section8 of the Act as a company with charitable objects etc.
A private company, except a company registered under Section8 of the Act having paid up share capital less than 50 lakhs rupees and average annual turnover of less than 2 crore rupees may convert itself into an OPC by passing a special resolution. Before passing such a resolution, the company must obtain a No Objection in writing from the creditors and the members.
The following exemptions have been made available to an OPC.
1. OPC is not required to hold an Annual General Meeting.
2. Sections in the act pertaining to quorum for general meetings, proxies, chairman for general meetings, Postal ballot, circulation of members, notice of general meetings and explanatory statement annexed to the notice, voting through electronic means, demand for poll, voting by show of hands, calling of extra ordinary general meeting, power of tribunal to call general meetings, are not applicable to an OPC.
3. An OPC can have one director and it shall be sufficient if the resolution passed by one director is entered into the minutes book. Minutes book is required to be signed and dated by such director. Similarly, in case any resolution which is required to be passed at a general meeting, it shall be sufficient if such resolution is entered in the minutes book required to be maintained by the company.
4. Provision relating to compulsory rotation of auditors is not applicable to OPC.
5. A One Person Company, company shall be deemed to have complied with the provisions of this Section173 of the Act pertaining to meetings of directors, if at least one meeting of the Board of Directors has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days.
6. An OPC limited by shares or by guarantee may enter into a contract with a sole member of the OPC who is also the director of the company. The terms of such contract should be either recorded in the memorandum of association or should be recorded in the minutes of the first meeting of the Board of Directors of the company held after entering into the contract.

Definition of a small company

The definition of small company is stated in Section2(85) of the Act as-

“small company” means a company, other than a public company,-

(i) paid- up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; and

(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such bigger amount as may be prescribed which shall not be more than twenty crore rupees.

Key Exemptions available to a small company are as follows-

All exemptions available to private companies shall be applicable to small companies.
Private company exempt from presenting cash flow statement as part of financial statements if it qualifies as a “small company” within the meaning of Section 2 (85) of the Act.
In case of a small company, the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.
A small company and dormant company shall be deemed to have complied with the provisions of Section173 of the Act, if at least one meeting of the Board of Directors has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days.

Proposed changes by the Companies (amendment), Bill, 2016

The Companies (Amendment) Bill, 2016 was introduced in Lok Sabha on March 16, 2016, the changes proposed by the amendment bill seeks to address the difficulties in the implementation of the Act. These amendments aim to facilitate ease of doing business by removing stringency in compliance requirements, and removing inconsistencies and rectifying omissions in the Act.

5The Companies (Amendment) Bill, 2016, inter alia, proposes the following, namely[1]:—

(a) simplification of the private placement process by doing away with separate offer letter, by making filing of details or records of applicants to be part of return of allotment only, and reducing number of filings to Registrar;

(b) allow unrestricted object clause in the Memorandum of Association dispensing with detailed listing of objects, self-declarations to replace affidavits from subscribers to memorandum and first directors;

(d) requirement of approval of the Central Government for Managerial remuneration above prescribed limits to be replaced by approval through special resolution by shareholders;

(e) a company may give loans to entities in which directors are interested after passing special resolution and adhering to disclosure requirement;

(f) remove restrictions on layers of subsidiaries and investment companies;

(g) allow for exempting class of foreign companies from registering and compliance regime under the Act;

(h) align prescription for companies to have Audit Committee and Nomination and Remuneration Committee with that of Independent Directors;

(i) test of materiality to be introduced for pecuniary interest for testing independence of Independent Directors;

(j) disclosures in the prospectus required under the Companies Act and the Securities and Exchange Board of India Act, 1992 and the regulations made thereunder to be aligned by omitting prescriptions in the Companies Act and allowing these prescriptions to be made by the Securities and Exchange Board of India in consultation with the Central Government;

(k) provide for maintenance of register of significant beneficial owners by a company, and filing of returns in this regard to the Registrar;

(l) removal of requirement for annual ratification of appointment or continuance of auditor;

(m) amend provisions relating to Corporate Social Responsibility to bring greater clarity.

Conclusion

The Government of India is moving towards a regime which permits businesses to operate autonomously without compromising on the interests of the stakeholders. The Government of India seems to be keen on removing regulatory bottlenecks which might potentially affect the smooth functioning of an enterprises. Start-ups which function as private limited companies enjoy the benefits of incorporation, have easier access to equity and debts and can have the necessary confidentiality of operations due to the exemptions granted to them under the Act.

Insofar as the Start-Up India Action Plan is concerned, it is expected that the government’s vision to provide support to ambitious entrepreneurs will encourage innovators and investors alike. Here is hoping that this grand vision is successfully implemented and maximum benefits are derived by the citizens of India.

[1] Statements of Objects and Reasons, companies (Amendment) Bill, 2016

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Compliances for Start-Ups under Companies Act

Sanjay R. Buch (Partner, Crawford Bayley and Co.)