Changes in Companies Act which give a fillip to start-ups

Manoj K Singh   New Delhi     Last Updated: October 17, 2017  | 22:10 IST
Changes in Companies Act which give a fillip to start-ups

The Government in order to augment the ease of doing businesses in the country has in recent past undertaken many initiatives which include Startup India, Make in India, Digital India and Skill India. Of all the initiatives, Start-up India is much talked about.  Launched on 16 January, 2016, the scheme looks to empower the start-ups. The term 'Start-up' has been defined by the Department of Industrial Policy and Promotion (DIPP) and recently the definition has been amended considering the long gestation period for the Start-ups.

In simple words, Start-Up means an entity, incorporated or registered in India any time but not prior to seven years from the launch of the scheme  except in Biotechnology Startups where an entity formed prior to ten years is also considered as start up having the annual turnover not exceeding Rs 25 crore in any preceding financial year, and working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

There are some qualifications also before an entity will qualify as start-up including but not limited to that such an entity is not formed by splitting up, or reconstruction, of a business already in existence.

Further, the taxation benefits are also available to start-ups after they have obtained certification from the Inter-Ministerial Board, setup for such purpose.

The concept of 'Start up' was till 13 June 2017 not officially recognized under Companies Act, 2013 though any company which qualifies with criteria defined by DIPP was considered as start-up. However, the Ministry of Corporate Affairs through an amendment included officially the concept of start-up under the Companies Act, 2013. Now, under the Act, a start-up company means to be a private company incorporated under the Act and recognised as a start-up in accordance with the notification issued by the DIPP.

Recently, the Act has been amended to align its provisions in line with Start-up India. These amendments include a simplified integrated process for incorporation of a company. To give effect to the same, e-forms INC-32 (commonly known as SPICe), INC-33 (e-Memorandum of Association) and INC-34 (e-Articles of Association) were brought into picture.

Now all the entities, with number of promoters up to seven, are mandatorily required to get its incorporation by filing e-form SPICe.  Generally, a person who wishes to be appointed as Director in any Company has to acquire his Director Identification Number (DIN) at first instance however, now after the amendment the facility of obtaining a DIN by such persons who are to be the first Directors of the Company (with promoters up to 7) is included in the Incorporation Form itself. Similarly, in the Incorporation Form, one can apply for name. Further, at the time of submission of the Incorporation Form with Ministry of Corporate Affairs, an automated pre-filled Form 49A and 49B pertaining to  Permanent Account Number (PAN) Tax Deduction and Collection Account Number (TAN) of the proposed company respectively is generated.

Prior to this amendment in the Act and Rules, a newly incorporated company had to file separate applications with the Income tax Department for obtaining the PAN and TAN.

The Amendment has also reduced the compliance obligations of start-ups. A private company which is a start-up, is now not required to include a cash flow statement during the course of preparation/presentation of its 'financial statements' which otherwise under Section 2(40) of the Act is the mandatory part of 'financial statements'. Similarly, the exemption earlier available to a One-Person company and small company that a company secretary or a director can sign the annual return is also now available to start-up companies. A start-up entity is further allowed to raise deposits from members (shareholders), with exemption from procedural compliance for five years otherwise mandatorily required under the Act.  Similarly, it is the obligation under the Act for the board of directors of the company to meet at least once in 120 days -- approximately four board meetings in a year. However, for start-ups convening at least one meeting of the board of directors in each half of a calendar year with the gap between the two meeting of not less than Ninety (90) days is sufficient to meet the requirement of Section 173 (5) of the Act.

The exemptions given under the recent amendment will no doubt give a relief to young entrepreneurs to work in a relaxing environment as for them otherwise even a small non compliance of the Act can lead to big penalties and punishment in future.

(The author Founding Partner of law firm Singh & Associates)

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