Formation of Companies, license under Section 25, Corporatization including

conversion under Part IX and Producer company

Intensive Study Course on Company Law

WIRC, ICAI CA Sanjeev Shah

15 March 2011

Contents

• Formation of company

• Section 25 company

• Part IX company: Conversion of partnership firm to a company

• Part IXA company: Producer company

2

Formation of Company

3

Background

4

Drivers for company formation

• New business

• Corporate restructuring

• Special purpose vehicle

• Joint-venture

• Not-for profit object

• Corporatization

5

Factors for company formation

6

Factors

Commercial /

Business

Regulatory

• Legal requirement

• Recognition

• Visibility etc.

• Company law

• Income Tax

• FDI & FEMA

• Stamp Duty

• Indirect taxes etc.

Types of Companies

7

Types of companies – liability of members

8

Limited

By Guarantee

Liability

Unlimited

Having Share

Capital

By Shares

Not having Share

Capital

Guarantee Shares

Not having

Share Capital

Having Share

Capital

Types of companies

9

Minimum paid-up share capital of

`1,00,000

Restricts by its Articles:

Transferability of shares

Maximum Members – 50 (not including

past & current employees holding

shares)

Invitation to public to subscribe to

shares or debentures

Invitation or acceptance of deposits

from any person other than its

members, directors or their relatives

Private Company

[Section 3(1)(iii)]

Not a private company

Minimum paid-up share capital of

`5,00,000

a private company which is a subsidiary

of a company which is not a private

company

Public Company

[Section 3(1)(iv)]

Types of Companies

Deemed Public Company – concept abolished since December 2000

Particulars Private Company Public Company

Members: *

Minimum 2 7

Maximum 50 ** no limit

Directors (Individuals only):

Minimum 2 3

Minimum Paid-up Capital ` 1,00,000 ` 5,00,000

Transferability of shares and

marketability thereof

Restricted No restrictions

Issue of Prospectus Prohibited from inviting public

for subscription of its shares /

debentures etc.

Can issue Prospectus

Acceptance of deposit Prohibited from inviting

deposits from public except

from members, directors or

relative

Allowed to accept

* Partnership firms, society, corporation sole cannot be members. Firm may be a member of section 25

company.

** excluding joint-holders, employees, ex-employees

Key differentiators between private co. and public co.

10

Private company - Privileges

11

Private Companies - Privileges

Illustrative privileges & exemptions

• No ceiling on remuneration to directors

• Can commence any business immediately after incorporation including

other objects

• Restrictions on transferability of shares

• Statutory meeting not required to be held

• Prohibition against loans to directors do not apply [section 295]

• Restriction on borrowings, inter-corporate loans and investments etc.

do not apply [section 372A]

• Profit and loss not available for public inspection

• Directors not liable to retire by rotation etc.

12

Subsidiary of a foreign body

corporate – Private company?

13

Section 4(6) & 4(7) – Scenario I

14

Foreign body corporate

(if incorporated in India –

public / private company)

Company

India

Outside India

Subsidiary

Foreign body corporate

Holding balance

shares

Private / public Company?

Section 4(6) & 4(7) – Scenario II

15

Foreign body corporate

(if incorporated in India –

private company)

Company

India

Outside India

Subsidiary

Foreign body corporate /

Individual

Holding balance

shares

Indian company /

Individual

Private / public Company?

Section 4(6) & 4(7) – Scenario III

16

Foreign body corporate

(if incorporated in India –

public company)

Company

India

Outside India

Subsidiary

Foreign body corporate /

Individual

Holding balance

shares

Indian company /

Individual

Private / public Company?

Procedure for Incorporation of

company

17

Brief Process for incorporation of a company

Obtain DIN & DSC for directors

Application for Availability of

Name

Drafting of incorporation

documents (MOA, AOA etc.)

Execution of incorporation

documents

Submission of incorporation

documents online

Payment of registration fees &

stamp duty

Follow-up Incorporation of

company

Certificate of Commencement of Business (for public

company)

18

Steps – Incorporation of Private / Public Company

Step 1: Obtain DIN & DSC

• Apply for –

−DIN for all proposed directors in Form DIN 1

− DSC from a certifying agency for -

at least 1 of the proposed directors and

a representative of promoter who will apply for the proposed name of the company

• Requirements for obtaining DIN and DSC

− Proof of identity

− Proof of residential address

− Proof of applicant’s father’s name

− Recent passport size photograph

− Certification

• DIN process simplified - General Circular No.5/2011 dated 4 March 2011 issued by MCA

− No physical submission of documents

− DIN will be approved by the system immediately online if DIN 1 is digitally signed

by the professional confirming the particulars/ docs

− In other cases, DIN cell will examine the application and clear within 1 – 2 days 19

Steps – Incorporation of Private / Public Company

Step 2: Name availability

• Decide on the 6 alternative names of the proposed company in the order of

preference

‒ Business activities

‒ Significance of pre-fix or suffix

‒ Keywords – minimum authorized share capital (see next slide)

‒ Comply with Guidelines for name availability

‒ No Objection

• Main objects

• Details of Promoters & Directors

• Name approved

‒ valid for period of 60 days

‒ further renewable for 30 days

20

Steps – Incorporation of Private / Public Company Minimum authorized share capital for use of Key words as part of name

21

Sr.No. Keywords Authorized

(Nominal) share

capital

In INR (million)

(i) Corporation 50.00

(ii) International, Global, Universal, Continental, Inter Continental,

Asiatic, Asia, being the first word of the name.

10.00

(iii) If any name at (ii) above is used within the name (with or without

bracket)

5.00

(iv) Hindustan, India, Bharat, being the first word of the name 5.00

(v) If any name at (iv) above is used within the name (with without

bracket)

0.50

(vi) Industries / Udyog 10.00

(vii) Enterprises, Products, Business, Manufacturing 1.00

The key words at (vi) and (vii) can be considered only if the company proposes to deal in / is already

carrying out various business activities

Steps – Incorporation of Private / Public Company

Step 3: Drafting of incorporation documents

• Memorandum of Association [MOA] – Schedule I, Table B or C or D or E

‒ Name

‒ Jurisdiction of Registered office

‒ Objects clauses

‒ Liability

‒ Authorized Share capital / Guarantee amount

• Articles of Association [AOA] – Schedule I, Table A or C or D or E

‒ rules and regulations for day-to-day management

• Transfer of shares, in case of a private company

• General meetings

• Board meetings etc.

• Documents of promoter entities

‒ Certificate of incorporation and memorandum and articles of association

‒ Board resolution(s)

• Forms

22

Steps – Incorporation of Private / Public Company

Step 4: Execution of incorporation documents

• Execution by promoters and first directors of the proposed company

• If execution outside India, notarization / apostilization or authentication by

Indian Embassy / Indian Consular Officer / Indian High Commission in the

country of execution

• Board resolution(s) and Proof of identity of non-resident promoter(s)

23

Steps – Incorporation of Private / Public Company

Step 5, 6 & 7: Submission of incorporation documents on MCA Portal;

Payment of stamp duty & registration fees; Follow-up

• Forms to be digitally signed by one of the first directors

• Certification by a practicing CA / CS / CWA

• Uploading of the Forms 1, 18 & 32

• Payment of stamp duty & registration fees

‒ Credit Card, Internet Banking, physical challan at bank

• No submission of physical copy to the ROC, where stamp duty payment is

electronic on MCA Portal

• Addendum

Circular no. HQ/9/2002-Computerization dated 9 March 2011 issued by MCA

• Payments upto ` 50,000 will be mandatorily required to be made through

electronic mode w.e.f. 27 March 2011

• Payments above ` 50,000

‒ Can be made through electronic mode / challan payment between the period 27th March 2011 to

1 October 2011

‒ Will be mandatorily required to be made through electronic mode w.e.f. 1 October 2011 24

Steps – Incorporation of Private / Public Company Simplified process - General Circular No. 6/2011 dated 8 March 2011 issued by MCA

• A separate category for approval of forms relating to incorporation shall be created by

ROC, which will have the highest priority for approval

• ROC will approve only Form-1 in regards to incorporation of company.

• Other incorporation forms viz. Form 18 relating situation of registered office of the

proposed company on its incorporation and Form 32 relating to appointment of first

directors shall be processed by the MCA system online.

• Average time taken for incorporation (post name approval) expected to be reduced to 1

day!

25

Steps – Incorporation of Private / Public Company Statutory costs for Company formation

26

• Registration fees is uniform across India

• Stamp duty depends upon the State where the registered office of the Company is located

* Above stamp duty is as per Bombay Stamp Act, 1958 assuming that the registered office of the Company is located in the

State of Maharashtra

Authorized (Nominal) Capital (INR)

Stamp Duty * (INR)

Registration Fees (INR)

500,000 1,200 17,200

1,000,000 2,200 27,200

5,000,000 10,200 108,000

10,000,000 20,200 158,000

100,000,000 200,200 608,000

250,000,000 500,200 1,358,000

500,000,000 1,000,200 2,608,000

500,000,000 2,000,200 5,108,000

Steps – Incorporation of Private / Public Company

Step 8: Incorporation

• Certificate of Incorporation – conclusive evidence

• Corporate Identification Number

‒E.g. U 99500 MH 2011 PTC 123456

27

Upon incorporation the subscribers to the Memorandum are

entered as members in the register of members [section 41(1)]; and

all money payable by any member to the company under the

memorandum or articles shall be a debt due from him to the

company [section 36(2)]

Steps – Public company, Post-Incorporation

Step 9: Certificate of Commencement of Business

• Public company to obtain Certificate of Commencement of Business before it

can commence any business activity

− Statement in lieu of prospectus

− Consent of the auditors

− Declarations from each directors

• Statutory report and statutory meeting

Some of the post-incorporation activities

• Application for PAN, TAN and other statutory registrations

• Opening of a bank account

• Getting in subscription money towards the shares subscribed to the MOA

• Stamping and Issue of share certificates

• Entries in the statutory registers

• Completion of formalities under FEMA, if applicable

• Appointment of auditors within 30 days 28

Section 25 Company

29

Section 25 company

• A limited company

− for promoting commerce, art, science, religion, charity or any other useful object,

and

− intends to apply its profits, if any, or other income in promoting its objects, and to

prohibit the payment of any dividend to its members

• Dispensation of the use of the word(s) "Private Limited" /

"Limited" as part of its name

• A section 25 company can be – − a private company or a public company

− Limited by guarantee or limited by shares

• A partnership firm can be a member

• 1 member 1 vote

30

Section 25 company

License from the Central Government [powers delegated to the

Regional Director] under section 25 of the company

• MOA as per Companies Regulations 1956

‒ Not Trade Union

‒ Use of Income and property for objects

‒ No remuneration or other benefits to members, subject to –

• Out-of-pocket expenses

• Reasonable interest on money lent

• Reasonable rent on property let

This does not affect remuneration to any officer other than a member.

• Any alteration to MOA and/ or AOA requires prior approval of RD

31

Section 25 company

Application in Form 24A

• Originally executed sets of MOA & AOA

• A declaration by a practicing CA / CS

• Details of directors, managers, secretary, promoters – names, addresses,

description, occupation,

• Details of companies/ associations/ other institutions in which promoter/

director/ manager/ secretary is a director/ member/ holding responsible

position, if any

• Details of the assets (with the estimated value thereof) and the liabilities as on

the date of the application / within 7 days of the application

• An estimate of the future annual income and expenditure including sources of

the income and the objects of the expenditure

• Brief description of the work, if any, already done OR work proposed to be

done

• Grounds of the application

• A declaration by each of applicant [promoter / director] on stamp paper

• Proof of identity of promoters 32

Section 25 company

• Within 1 week of making an application to the RD, publish an advertisement in

1 English News Paper in English and 1 regional daily in the regional language

‒ Draft MOA and AOA to be open for inspection

‒ Objection, if any, to be communicated within 30 days of the advertisement

33

Corporatization under Part IX

34

Corporatization under Part IX – Additional requirements

• Minimum 7 members

• Last partnership deed to be similar to MOA

• Consent of all the Partners

• Date and place of general meeting

• Last audited accounts

• Last income tax assessment order / an acknowledged copy of the return of

income

• Names, addresses and occupations of all the partners of the Firm, not more

than six clear days before the application for registration

• No of shares to be taken up i.e. subscribed and paid-up share capital

• Form No. 39 to be digitally signed by 2 directors

35

Producer Company

36

Producer Company under Part IXA

• To extend the benefits of a corporate entity available to co-operative

societies engaged in primary sector such as farmers, milk producers etc.

• To link rural economy with emerging new opportunities

• To benefit the persons engaged in Primary Produce related activities

‒ Agriculture, Viticulture, Horticulture, Floriculture

‒ Animal husbandry

‒ Pisciculture,

‒ Forestry, Forest products

‒ Re-vegetation

‒ Bee raising

‒ Farming plantation products

‒ Handloom, handicraft , cottage industry etc.

37

Producer Company under Part IXA

38

Particulars Producer company

Type of company Private company limited by shares

Objects Specified

Activities More than 1 state

Minimum Members:

Individuals 10

Producer institutions [PIs] 2

Individuals + PIs 10 individuals + PI(s)

Directors (Individuals only):

Minimum 5

Maximum * 15

* Inter-State co-operative society incorporated as a Producer Company may

have more than 15 directors for 1 year from the date of its incorporation as a

Producer Company.

Producer Company under Part IXA

Additional filing requirements for an inter-state co-operative society

converting into a producer company

• A copy of the special resolution approved by not less than 2/3rd of the total

members of the society for its incorporation as a producer company

• A statement indicating –

‒ The names, addresses and occupations of the director or chief executive of the

society, by whatever name called

‒ List of members of the society

• A statement showing that the society is engaged in one or more objects that are

required for a producer company

• A declaration that the particulars in (a), (b) and (c) are correct, certified by 2 or

more directors of the society.

39

Producer company vs. Private company

Particulars Producer company [always a

private company]

Private company

Business activities Specified activities No specifications

Liability of members Limited by shares Limited by shares or

guarantee / Unlimited

Maximum Members No limit 50

Minimum Directors 5 2

Maximum Directors 15 12

Tenure of Directors Minimum 1 year, Maximum 5

years with eligibility for

reappointment

No limit unless otherwise

provided in AoA

Voting Individuals as members: 1

member 1 vote

Only PIs as members: 1st year

- as per shareholding;

Subsequently - as per

patronage

On show of hands: 1

member 1 vote

On poll: As per

shareholding

40

Producer company vs. Private company

Particulars Producer company [always a

private company]

Private company

Chief executive Mandatory N.A.

Expert / Additional

Director

Not exceeding 1/5th of total no.

of directors

N.A.

Voting by Expert /

Additional Director

Can be appointed as

Chairman, but cannot vote on

election of a Chairman

N.A

Notice of Board Meeting 7 days notice, shorter notice

possible with consent

As per AoA

Eligibility of a member Producer / PI No specification

1st AGM Within 90 / 365 days Within 18 months or 9

months from the close of1st

financial year

41

Glossary

Act - Companies Act, 1956

AGM - Annual General Meeting

AOA - Articles of association

DIN - Director Identification Number

DSC - Digital Signature Certificate

FDI - Foreign Direct Investment

FEMA - Foreign Exchange Management Act, 1999

MOA - Memorandum of Association

PAN - Permanent Account Number

RD - Regional Director

ROC - Registrar of Companies

42

Contact details

Sanjeev Shah, ACA, ACS

Tel: +91 (22) 6747 6023 (D) / 6619 8900 (B)

Mobile: +91 98201 58530

Fax: +91 (22) 6619 8901

e-mail: sanjshah@deloitte.com

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