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About bsamrishindia.com

He is FCS, LL.B. He has over 18 years of experience as a corporate legal professional. He has rich experience in handling Corporate legal, Capital Market and Corporate Restructuring matters.

FDI in Cash & Carry Wholesale and Retail Trade in a Single Entity

Cash & Carry Wholesale trading/Wholesale trading, means sale of goods/merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers and thus sales are from B2B.

Retail Trade means sale of goods/merchandise to end consumers and thus sales are from B2C.

A wholesale/cash & carry trader can undertake retail trading, subject to the conditions as applicable. An entity undertaking wholesale/cash and carry as well as retail business will be mandated to maintain separate books of accounts for these two arms of the business and duly audited by the statutory auditors. Conditions of the FDI policy for wholesale/cash and carry business and for retail business, whether single brand retail or multi brand retail, have to be separately complied with by the respective business arms.

To further explain, assuming all below entities be the one with FDI

A – a wholesaler/ cash & carry trader

B – a marketplace e-commerce

C – a single brand retail trader

D – a multi brand retail trader

  • If A wants to do activities of C and D in separate business arms under the same entity, FDI policy have to be separately complied with by the respective business arms with respect to conditions for retail trade for single and multi brand respectively besides complying with conditions of wholesale cash & carry.

 

  • If B wants to do activities of A, the purchases of B from A cannot be more than 25% of the total purchases of B, if under separate entity as a group company

 

  • C is permitted to do e-commerce to retail customers in the same legal entity

 

  • A and B are not permitted to do sales to retail customers

If business for Cash & Carry Wholesale Trade and Retail Trade are to be done under a single entity, it is essential that the conditions of the FDI policy for wholesale/cash and carry business and for retail business, whether single brand retail or multi brand retail, have to be separately complied with by the respective business arms.

You may also like to read about

 FDI in Single Brand Product Retail Trading 

FDI in Retail Trade and E-Commerce

 

FDI in Cash and Carry Wholesale Trade is not FDI in Retail Trade

Like FDI in multi brand retail trade, FDI in Cash and Carry Wholesale Trade was also initially opposed by trade bodies saying that these stores like Metro Cash and Carry, Walmart Cash and Carry are another form of Retail Trade and FDI has always been restricted and controlled in retail trade. However, the Government was determined and ultimately the term ‘cash and carry wholesale’ was clarified as being meant for B2B sales in wholesale trade.

FDI in Cash & Carry Wholesale Trading/Wholesale Trading (WT):

Cash & Carry Wholesale trading/Wholesale trading, means sale of goods/merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers. Wholesale trading would, accordingly, imply sales for the purpose of trade, business and profession, as opposed to sales for the purpose of personal consumption. The yardstick to determine Wholesale Trading would be the type of customers and not the size and volume of sales. Wholesale trading includes B2B e-Commerce.

 

Sector/Activity % of Equity/

FDI Cap

Entry Route
Cash & Carry Wholesale Trading/Wholesale Trading (including sourcing from MSEs) 100% Automatic

 

With Cash & Carry Stores around, Retailers can keep inventory to minimum and purchase directly as and when needed as lead time of supply would be negligible and therefore such FDI in Cash & Carry Wholesale will support growth of business for local Kiryana Stores. WT of goods would be permitted among companies of the same group. However, such WT to group companies taken together should not exceed 25% of the total turnover of the wholesale venture.

For doing business of Cash & Carry Wholesale and Retail trade in the same entity, please refer to

FDI in Cash and Carry Wholesale Trade is not FDI in Retail Trade

You may also like to read about

FDI in Single Brand Product Retail Trading 

FDI in Retail Trade and E-Commerce

FDI in Retail Trade and E-commerce

India is assessed as having huge population falling in Middle Income Group band with high purchasing power and with majority population being young and with smart phones in excess of four hundred million, Retail and E-commerce sector would remain the hottest destination. Due to concerns with respect to protection of local kiryana stores, agriculture sector and village and cottage industry (the sectors which have employed largest number of people in India), certain restrictions are there on FDI in Retail Trade and for similar concerns FDI is not permitted in inventory based model of E-commerce as E-commerce is also B2C like Retail trade.

FDI in inventory based model is similar to FDI in multi brand retail trade which is highly regulated. Inventory based model of E-commerce is the one in which E-commerce company buys inventory and do sales from its E-commerce platform which is different from market place model where sellers list their respective inventories on the market place platform of E-commerce company and ownership of inventory continues to be with sellers. Gradually, we might see easing when it gets demonstrated that FDI has helped developments in these sectors and improved employability besides improvement of back-end infrastructure of warehousing, packaging, logistics etc.

FDI in E-commerce Sector:

E-commerce means buying and selling of goods and services including digital products over digital & electronic network.

Sector/Activity % of Equity/FDI Cap Entry Route
E-commerce activities 100% Automatic
  • 100% FDI under automatic route is permitted in marketplace model of e-commerce.
  • FDI is not permitted in inventory based model of e-commerce.
  • Marketplace e-commerce entity will be permitted to enter into transactions with sellers registered on its platform on B2B basis and provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services
  • An e-commerce entity will not permit more than 25% of the sales through its marketplace from one vendor or their group companies calculated on financial year basis.

So, market places like Amazon cannot permit sales of more than 25% of the sales from one vendor or group companies of Amazon. All major e-commerce companies are operating through separate entities for B2B Sales and B2C sales.

 You may like to read about FDI in Single Brand Product Retail Trading 

FDI in Single Brand Product Retail Trading

India being amongst largest markets of the world, is eyed by all major international companies in the sphere of retail, e-comerce and wholesale trade. India is assessed as having huge population falling in Middle Income Group band with high purchasing power and with majority population being young and with mobile connections in excess of one billion, this sector would remain the hottest destination. There are more concerns on FDI in multi brand retail trade led by brands like Walmart, Tesco etc. due to concerns with respect to protection of local kiryana stores, agriculture sector and village and cottage industry (the sectors which have employed largest number of people in India), and the sector continues to be regulated and restricted for FDI. However, there are comparatively less concerns for single brand retail trading.

FDI in Single Brand product retail trading (SBRT):

Foreign Investment in Single Brand product retail trading is aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through excess to global designs, technologies and management practices.

 

Sector/Activity % of Equity/

FDI Cap

Entry Route
Single Brand product retail trading 100% Automatic up to 49%

Government route beyond 49%

FDI in SBRT would be subject to the following conditions:

  • products to be sold should be of a ‘Single Brand’
  • products should be sold under the same brand internationally.
  • products which are branded during manufacturing.
  • a legally tenable agreement with the brand owner for licensing/franchise/sub-licence agreement
  • for foreign investment beyond 51%, sourcing of 30% of the value of goods purchased by the investee company, will be done from India, preferably from MSMEs, cottage industries etc with sourcing as an average of five years’ total value of the goods purchased, beginning 1st April of the year of opening of the first retail store and subsequently to be met on annual basis.
  • SBRT through brick and mortar stores are permitted for retail through e-commerce also
  • SBRT entity would be permitted to set off incremental sourcing of goods from India for global operations during initial 5 years against mandatory sourcing of 30%. Incremental sourcing means increase in the value of the global sourcing in a FY from India over the preceding FY either directly or through its group company. After 5 years, SBRT entity shall be required to meet 30% sourcing norms directly.

So, FDI with a controlling stake for single brand retail trade is permitted with sourcing conditions from MSMEs and cottage industries for developments and benefits to MSMEs and cottage industries and thus promoting Make in India.

 For knowing more about FDI in multi brand retail trade, please read

FDI in Multi Brand Retail Trade 

FDI in Multi Brand Retail Trade

FDI in multi brand retail trade is regulated. The restrictions may be gradually eased when it gets demonstrated that FDI has helped developments in these sectors which are important from politically and employability point of view as FDI in these sectors can truly help in doubling farm income of farmers.

FDI in Multi brand Retail Trade (MBRT):

All local Kiryana (General) Stores fall into Multi brand retail trade and therefore, opening of this sector for FDI had always been a political decision rather than a decision on merits and market compulsions and with gradual political will of successive governments in recent past, the sector has opened up though with some limitations.

 

Sector/Activity % of Equity/

FDI Cap

Entry Route
Multi Brand Retail Trading 51% Government
 

FDI in multi brand retail trading, in all products, will be permitted, subject to the following:

 

(a)        FDI not allowed in Fresh agricultural produce including poultry, meat etc

(b)      Minimum amount as FDI would be US $ 100 million

(c)       At least 50% of total FDI brought in the first tranche of US $ 100 million, shall be invested in ‘back-end infrastructure‘ within three years like warehouse, manufacturing, packaging, logistics etc

(d)      At least 30% of the products purchased in value shall be sourced from Indian MSME, farmer cooperatives etc, which have a total investment in plant & machinery not exceeding US $ 2.00 million.

(e)      To be met as an average of initial five year purchases and subsequently on annual basis

(f)        Retail Stores to be set up in cities with population more than 1 Million based on 2011 census

(g)      States may frame their own policies

The objective to allow FDI in this politically sensitive sector is to attract investments in supply chain management, the forte of large multi brand retail trade formats like Walmart, Tesco etc. and requirement of sourcing of these products from Indian MSME and farmer cooperatives will strengthen these sectors.

For knowing more about FDI in single brand retail trade, please read

FDI in Single Brand Product Retail Trading 

 

Shareholders’ Meeting of a Private Limited Company in India: How Convenient

Annual General Meetings:

In United Kingdom, private companies are not obliged to hold Annual General Meetings. Besides, the Companies Act 2006 (UK Act) does not specify what business must be transacted at an AGM.

In Singapore, an AGM is a mandatory annual meeting of shareholders. Under section 175(A) of the Singapore Companies Act, a private limited company can choose not to hold AGMs if all the shareholders and members passed a resolution. Thereafter, all matters which are to be dealt with at the AGM can be settled through the passing of written resolutions. The resolutions can be circulated by paper-form or through other legible form agreed upon by the company and the shareholders such as e-mails.

In India, as per the provisions of section 96 of the Companies Act, 2013, every company is mandatorily required to hold an annual general meeting of the shareholders within six months of the close of the financial year to transact ordinary business such as laying down the annual financial statements, etc. The meeting is required to be held either at the Registered Office of the company or at some other place within the city.

 

Extra-ordinary General Meeting:

Any other meeting of the shareholders of the company other than the AGM is called Extra-ordinary General Meetings (“EGM”). EGM as the name suggests is called to transact certain business agendas which require prior or immediate approval from the members of the Company, approvals which can’t be delayed till the holding of AGM. EGMs can be held anywhere in India.

Usually, private limited companies prefer to hold EGM for almost all matters requiring shareholders’ approval except ordinary businesses like adoption of annual accounts, etc which are mandatorily required to be dealt at AGM.

 

Common Matters dealt with in EGMs:

In general,companies hold EGM for approving the below mentioned matters:

  • Change in the name of the company
  • Alteration of Memorandum of Association (Increase Share Capital)
  • Change in the Object Clause
  • Alteration of Article of Association
  • Allotment of shares under preferential issue or conversion of loan into equity.
  • Issue of bonus shares, ESOP, sweat equity, convertible debentures,
  • Buy Back of Shares
  • Providing loans or making investment exceeding certain limits
  • Approval of Scheme of Merger and Amalgamation
  • Voluntary wind up

 

Companies Amendment Act, 2017: Ease of holding these General Meetings

The Act has been diluted for facilitating ease of holding these general meetings. MCA through the Amendment Act, vide its notification dated 09.02.2018, has granted relaxation to a Wholly Owned Subsidiary (WOS) in holding such meetings. Now, WOS of companies incorporated outside India, can hold their EGM even at a place outside India.

 

Our view:

This amendment has brought in limited convenience to foreign body corporate in being able to hold EGM of their WOS outside India. Prior to this, only board meetings (and not EGM) could be held outside India.

This above relaxation is only w.r.t EGM and not AGM. However, AGM of an unlisted company can now be held anywhere in India (rather than only at place around registered office) subject to advance approval from its members.

We, at bsamrishindia are of the view that though the requirements w.r.t the shareholders meeting have been diluted but are half baked. Much more is desired in terms of simplification. We fail to understand why the relaxation to hold EGM anywhere outside India is only w.r.t WoS companies and not for other companies (like joint ventures) where the foreign company has substantial stake in the Indian entity. The quorum provisions in case of a private limited company require minimum of two shareholders personally present (section 103). Proxies are not counted for the quorum. Considering this stringent requirement of quorum, the relaxation prescribed by the Companies Amendment Act, 2017 was required more in case of companies which are not WoS.

We are also of the opinion that relaxation to hold EGM outside India should be extended to AGM as well. We are hopeful that further amendments are going to come soon making it optional for the private limited companies to mandatorily hold AGM.

 

Time Limits for Allotment and Issue of Share Certificates

 “Allotment of shares” is used to indicate “… the creation of shares by appropriation out of the unappropriated share capital to a particular person. Issue of shares is something distinct from allotment and is some subsequent act whereby the title of the allottee becomes complete.

There are certain restrictions w.r.t time lines within which securities are to be allotted after the company has received Share Application money. Law also provides for time limits within which share certificates are to be issued. We have tried to summarize the same in this blog.

In terms of Section 179, the power to issue securities have been vested on the Board of Directors of the company by way of passing resolution at meetings of the Board.

Present law[1] defines the time limits for allotment of securities and issuance of security certificates in different situations. These have been summarized as follows:-

Allotment of Securities

S. NO. PARTICULARS DETAILS
1. Allotment within 60 days Allotment shall be done within 60 days of receipt of application money.
2. If not allotted within 60 days, refund in next 15 days If allotment is not done within 60 days then refund the whole application money within next 15 days.
3. If not refunded within 15 days ·         Refund application money along with interest @12% p.a. after the expiry of 60 days, and·         It shall be treated as a public deposit after the expiry of the said 15 days.

Issue of Share Certificates

Section 56(4) of the Companies Act, 2013 contains the provisions related to time limits for the delivery of the certificates of all securities allotted, transferred or transmitted.

S. NO. PARTICULARS DETAILS
1. In case of subscribers to memorandum Within 2 months from the date of incorporation
2. In case of allotment of shares Within 2 months from the date of allotment
3. In case of transfer or transmission of securities Within 1 month from the date of receipt by the company of the instrument of transfer or intimation of transmission
4. In case of allotment of debentures Within 6 months from the date of allotment

ALLOTMENT OF SHARES TO NON-RESIDENT

  • W.e.f 7th November, 2017, FDI Regulations have been aligned with the time limit specified in Companies Act, 2013. Therefore, even in cases of money recieved by way of inward remittance towards share capital, shares must be allotted within 60 days of its receipt.

 [1] Section 56(4) of the Companies Act, 2013, Regulation 3.4.1 of FDI Regulations read with FEMA, Section 46(2) of the Companies Act, 2013, and Companies (Acceptance of Deposits) Rules, 2014


Closure of Liaison Office / Branch Office

There is a two-stage registration process for a Liaison / Branch office (Foreign Companies) of a foreign Parent Company. First is RBI approval and the second is registration with the Registrar of Companies (RoC). The license is given for three years and thereafter, it requires renewal. Closure of these foreign companies in India requires RBI approval and a report from RoC as to the state of compliances.

A. Application with AD Category – I bank.

An application be made with the designated AD Category – I bank for closure of Branch/Liaison office. The application is to be supported by the following documents:

  1. Permission/ Approval letter received from RBI for establishing Branch/ Liaison office.
  2. Confirmation from parent company that no legal proceedings in any court in India are pending and legal impediments to the remittance.
  3. A report from the Registrar of Companies regarding compliance with Companies Act, 2013
  4. Auditors Certificate on:
    • The manner of arriving remittable amount supported by statement of assets and liabilities
    • Confirmation that all liabilities including gratuity and employee benefits have been paid or provided for
    • Confirmation no income accruing from sources outside India including from exports has remained un-repatriated to India.
  1. Any other documents as may be required by RBI.

B. Remittance of winding up proceeds:

Remittance of winding up proceeds i.e. remittance of assets of branch or liaison office established in India shall be governed by the guidelines issued under Foreign Exchange Management (Remittance of assets) Regulations. Designated AD Category-I bank may allow remittance of winding up proceeds after receiving application of closure of branch office along with the documents mentioned above.

At the end, designated AD Category – I bank will report to the Reserve Bank (the Regional Office concerned for LOs and Central Office for BOs), along with a declaration stating that all the necessary documents submitted by the BO / LO have been scrutinized and found to be in order for closure of Branch Office.

Similar topics

  1. Registering a Branch Office in India
  2. Registering a Liaison Office in India
  3. Liason office / Branch office vs. Wholly owned Subsidiary
  4. Strike-off of companies
  5. Incorporating Wholly Owned Subsidiary

Sources:

  1. Notification No. FEMA 22(R)/2016-RB dated March 31, 2016 on Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016
  2. Companies Act, 2013
  3. General Circular No. 01/2017,“F.No. 1/23/2013-CL-V” dated 22nd Feb 2017 notification on Section 391(2) closure of place of business by a Foreign Company
  4. Notification No. FEMA 13 (R)/2016-RB Foreign Exchange Management (Remittance of Assets) Regulations, 2016

Change in Financial Year under the Companies Act, 2013

Companies Act 2013 (New Act) brought in many changes. One such change is the concept of uniform Financial Year. Companies Act 1956 (Old Act) defined Financial Year in Section 2(17) as:

“Financial Year” means, in relation to any body corporate, the period in respect of which any profit and loss account of the body corporate laid before it in annual general meeting is made up, whether that period is a year or not

The definition is open ended and gave leeway to Companies to have financial year of their own, either it may be a calendar year, a financial year or any period with 12 months in the year as per the convenience of the business. But for the purpose of Income Tax, the accounts were closed on 31st March every year.

However, the New Act restricts the practices that were carried out under the Old Act. As per the New Act, every company is obliged to have the financial year starting from 1st of April to 31st March. Companies Act 2013 defines Financial Year under Section 2(41) as:

“Financial Year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up:

Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year:

Provided further that a company or body corporate, existing on the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause.

  

Major takeways from provisions of Section 2(41) of the Companies Act 2013:

  1. Obligation on all companies or bodies corporates to follow uniform financial year starting from 1st of April and ending on 31st of March.
  2. From the date of notification of the section, i.e., 01/04/2014, existing companies or bodies corporates had a transitional period of 2 years to align their financial year as per these provisions.
  3. Exceptions to these provisions are available to those companies or body corporates, which is a holding company or a subsidiary of a company incorporated outside India, provided they make an application (in NCLT-1) to the Tribunal and take its Approval.
  4. Justification given while filing the application with the Tribunal can be as follows: Alignment of Financial Year of the Subsidiary Company for consolidation of accounts as per the laws of the land where the Holding Company is incorporated.
  5. As per the orders passed by various benches of National Company Law Tribunal (NCLT), the Tribunal is seeking a report from the jurisdictional Registrar of Companies (ROCs), wherein the ROCs are being asked to give any objection as to why the Tribunal should not Approve the application filed for change in Financial Year.

 

Those who are interested in knowing about the detailed procedure, please read on.

Procedural Aspects to go about changing the Financial Year: 

  1. Board Meeting: The Company needs to call Board Meeting for the purpose of passing the following Resolutions:
    • Change in financial year of the Company
    • Authorization to the Company Secretary in practice for appearance before NCLT.
    • Executing Memorandum of Appearance in form NCLT-12.
  1. Application to the NCLT: The Petition under the sub-section (41) of Section 2 be filed to the Tribunal in Form NCLT-1 and shall be accompanied by such documents as are mentioned in Annexure –B.
    • NCLT 1: Petition made in the NCLT-1 should include the following:
      • Details of Original Application
      • Jurisdiction of the Bench
      • Limitation: (If applicable)
      • Facts of the case are given below
      • Relief(s) sought.
      • Particulars of Bank raft evidencing payment of fee for the petition
      • Memorandum of appearance
    • ANNEXURE B: Annexure –B of the NCLT rules, 2016  includes the following :
      • Copy of Memorandum and Articles of Association.
      • Copy of balance sheet of the Companies.
      • Affidavit verifying the petition.
      • Bank draft evidencing payment of application fee.
      • Memorandum of appearance with copy of the Board’s Resolution.
      • Letter of consent from the Holding Company to its Subsidiary Company to align its financial year as per the financial year followed by the Holding Company 
  1. Order of Tribunal: Certified copy of the order shall be filed with the Registrar of Companies (ROC) in form INC-28 within thirty days.

 

 

Appointment of a Non Resident as Managing Director

It is mandatory to appoint a Managing Director in case of Listed Companies and the Public limited companies having paid up share capital of INR 100 million (~1.55 m USD). Many Indian subsidiaries of foreign companies follow the general practice of appointing Non-Residents on their Board of Directors. Though it is not mandatory to appoint a Managing Director for a Private Limited Company, it may, sometimes out of its own requirement, may decide to appoint one. In case it does and the proposed appointee is a Non Resident, it may be wise decision to go through this note where we have summarized all the important provisions relating to appointment, duties, Board procedures and disclosures to be done, for informed decision and easy reference.

For appointment of a Managing Director, provisions of Section 196 of the Companies Act, 2013 is to be followed. While provisions relating to appointment as given in Section 196 read with Schedule V are all applicable, limits and provisions relating to remuneration (payable to a Managing Director) is not applicable to a Private Limited company.

 

S. No. Particulars Details
1. Appointment and Remuneration Appointment and remuneration of Managing Director is prescribed in Section 196 and Schedule V. The eligibility criteria to be appointed as MD is as follows:

  • MD should be aged between 21 years of age till 70 years of age.
  • He not be undischarged insolvent
  • He has not suspended any payment to creditors
  • He has not been a convict of an offence and sentenced for a period of more than six months
  • He should be a Resident of India

With effect from exemption notification issued on 5th June, 2015, the criteria of residential status has been done away with for private companies. Also provisions w.r.t. managerial remuneration are exempt on private companies.

 

2. Duties
  • He is required to disclose his interest (including his shareholding) in any other company or companies in the first Board Meeting in which he participates as a Director.
  • And other duties as prescribed under Section 166. Example: –
    • He shall act in good faith in order to promote the objects of the Company.
    • He shall exercise his duties with due and reasonable care, skill and diligence.
    • He shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives.
  • He shall not contravene the provisions of Section 164(2). Disqualification u/s 164(2)

To read more on Disqualification of Directors, please visit Disqualifications of Directors : Non-filing of B/s and Annual Returns

3. Attendance in at least one Board Meeting S 167 (1) (b) requires every Director of the company to be present in at least one Board Meeting during a span of 12 months. A NR-Director can either participate through Video Conferencing or the Company can hold Board Meetings abroad. There is no restriction in the Companies Act, 2013 w.r.t. to holding of Board Meetings outside India.

 

4. Board Meeting through Video Conferencing (VC) NR-Director can attend the Board Meeting through Video Conferencing or other Audio Visual Means. However, there are certain items which cannot be transacted through VC: –

  • Approval of financial statements
  • Approval of board’s report
  • Approval of prospectus
  • Approval of mergers, amalgamations etc

Quorum

Any Director, can participate through Electronic Mode in respect of restricted items with the express permission of Chairman, however, he neither be entitled to vote nor be counted for the purpose of Quorum in respect of such restricted items.

Please visit Board Meeting through Video Conferencing or other Audio Visual Means, for more information on conducting a Board Meeting through Video Conferencing

 

5. Signing of Financials and Board’s Report

 

If the company has appointed a MD, it is mandatory for him to sign the financials of the Company and the Board’s Report.

 

6. Annual Report on CSR Activities (Section 135 of the Companies Act, 2013)

 

The Companies on whom CSR or Corporate Social Responsibility is mandatory have to get their Annual Report on CSR Activities signed by the MD of the Company. This Annual Return forms a part of the Board’s Report.

 

7. Procedure for Appointment For the appointment as Director, NR is required to obtain

  • Digital Signature Certificate (DSC) and
  • Directors Identification Number (DIN).

Since the proposed Director is a NR, his documents pertaining to obtaining the DSC and DIN will be apostilled / notarized / concularised as the case may be.

 

 

Note: please note that the provisions elaborated are in terms of their applicability on private companies

 

 

Strike Off Under Companies Act, 2013

With notification of Section 248-252 by the MCA vide Notification No. 16/2016 on 26th December, 2016, the process of striking off the name of the Company from the Register of Companies through the Fast Track Exit often called FTE, stands revised. The “Fast Track Exit” mode and now “Strike Off” mode was introduced by the MCA to give opportunity to the defunct companies to get their names struck off from the Register of Companies.

 

Eligibility Criteria for Companies to opt for Strike Off:

The following companies are eligible for opting for strike off:

  • A company which has failed to commence its business within one year of its incorporation; or
  • A company which is not carrying on any business or operation for a period of 2 immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455,

Modes of Strike Off

There are two modes of Strike off:

  • Suo moto by the Registrar of Companies (Section 248(1)):

For reasons that the company has failed to commence its business within one year or had not been doing business or operation for last two financial years.

  • By way of Application by the Company (Section 248(2)):

The Company can file an application voluntarily with the Registrar of Companies for Striking off the name of the Company. The grounds for voluntarily making such an explanation by the company remains the same as is mentioned in the 1st mode, i.e. the company has failed to commence business or had not done any business for last two financial years.

Here in this blog, we have discussed this second mode.

As per the provisions of Section 248-252 of Companies Act, 2013 read with Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016, a company may file an application for strike off as detailed herein below:-

  • A company may file an APPLICATION in the Form STK-2 (shall be accompanied by certain prescribed documents) along with the fee of Five Thousand Rupees for removing the name of the company from the Registerof Companies, after extinguishing all its liabilities.
  • The main ingredients for such an application are:
    • Application in form STK-2
    • Government filing fees: INR 5,000/-
    • Copy of Board resolution authorizing the filing of this application;
    • A statement of accounts showing nil assets and liabilities of the Company which shall be not more than thirty days before the date of application and certified by a Chartered Accountant
    • Shareholder’s approval by way of Special Resolution
    • In the case of a company regulated by any other authority, approval of such authority shall also be required.
    • Indemnity bond [to be given individually or collectively by the director(s)] in Form No. STK-3;
    • Affidavit in Form No. STK-4

Companies on whom Strike off under Section 248 is Not Applicable

The guidelines does not inter-alia cover

  • Listed companies;
  • Companies that have been delisted due to non-compliance of listing regulations or listing agreement or any other statutory laws;
  • Vanishing companies;
  • Companies where inspection or investigation is ordered and being carried out or actions on such order are yet to be taken up or were completed but prosecutions arising out of such inspection or investigation are pending in the Court;
  • Companies where notices have been issued by the Registrar or Inspector (under Section 234 of the Companies Act, 1956 (old Act) or section 206 or section 207 of the Act)and reply thereto is pending;
  • Companies against which any prosecution for an offence is pending in any court;
  • Companies whose application for compounding is pending;
  • Companies which have accepted public deposits which are either outstanding or the company is in default in repayment of the same;
  • Companies having charges which are pending for satisfaction; and
  • Not-for-profit Companiesregistered under Section 25 of the Companies Act, 1956 or section 8 of the Act.

Some other facts to consider

  • If there is pending prosecution against the company and its directors: If the pending prosecutions are only for non-filing of Annual Returns under section 92 and Balance Sheet under section 137 of the Act, such application may be accepted provided the applicants have already filed the compounding application. However, steps for final strike of the name of the company will be taken only after disposal of compounding application by the competent authority.
  • NOC from Tax Authorities: NOC is not required from Income Tax / Sales Tax / Central Excise / other Govt. authorities. But all directors need to confirm that there are no dues pending against Company with any such authorities. And MCA will send notice to the Income Tax / other authoritiesenquiring whether they haveany objection for striking off the name of the said Company.
  • Manner of notarisation, apostilled or consularisation of indemnity bond and declaration in case of foreign nationals or non-resident Indians: As provided under STK rules, if the Director of the Company applying for striking off, is a foreign national or non-resident Indian, the indemnity bond and declaration shall be notarised or apostilled or consularised in the country of the foreign national.
  • Stamp Duty: Stamp Duty is required to be paid on Affidavit and Indemnity Bond as per respective State Stamp laws.
  • Make sure that the company does not maintain any bank account as on the date of filing application and also does not have any assets and liabilities.

Brief procedure followed after filing of application for Strike off

  • Where a company has filed an application (e-form STK-2), a public notice shall be issued by ROC (Form STK-6) inviting objections to the proposed Strike off, if any. The objections are to be sent to the respective ROC within thirty days from the date of publication. The notice shall be placed on the website of Ministry of Corporate Affairs, published in the Official Gazette and published in a leading English newspaper and at least in one vernacular newspaper where the registered office of the company is situated. Application shall also be placed on the website of the company, if any.
  • Before striking off, ROC shall satisfy itself that sufficient provision has been made for realisation of all amounts due to the company and for the payment or discharging of its liabilities.
  • Notice of striking off and dissolution of company – After having followed and dealt with the above steps, the Registrar shall strike off the name and dissolve the Company. Notice of striking off and its dissolution to be published in the Official Gazette (Form STK 7). The published notice shall be to the effect that the company’s name has been struck off the register of companies and the said company dissolved with effect from the date (mentioned therein). The same shall also be placed on the official website of the Ministry of Corporate Affairs.

 

Subscription of shares at a Premium at the time of Incorporation

Company Incorporation has been simplified significantly with turnaround time a lot lesser than what it used to be. While shares are generally subscribed at par by the promoters at the time of incorporation, there can be a situation where shares are to be subscribed by the investors. In such situation, promoters enter into share subscription agreement and the terms may require investor shareholders to subscribe shares at a premium. Companies Act, 2013 do not prohibit such subscription of shares at a premium but it might be difficult to justify such a transaction under Income Tax Act. Section 56 of the Income Tax Act prescribes issuance of shares at fair value. The moot question is, … what is the fair value of a Company yet to be incorporated or for that matter, of a newly incorporated company yet to commence its business?

Share premium can be defined as the excess amount received by the company over and above the face value of its shares. All types of companies can issue their shares at premium.

 

Shares at a premium at the time of incorporation

As per the provisions of Section 52 of the Companies Act, 2013 a company can issue shares at a premium, whether for cash or otherwise. But, you will hardly find the practice of issue of shares at premium, at the time of incorporation, because no subscriber would like to take shares at a premium. Issue of shares at premium at the time of incorporation of Company is very much valid under the provisions of Companies Act, 2013.

In the decided case of Green infra ltd. (the assessee), where the Mumbai Income Tax Appellate Tribunal (Tribunal) held that shares allotted at premium by newly incorporated company is neither sham nor income and cannot be taxed as income under section 56(1) of the Income tax Act, 1961.Mentioned below are the important highlights of the ruling by ITAT:

  • Issue of shares at premium is a commercial decision and does not require any justification under any law currently in force.
  • The amount of securities premium will depend upon the business terms.There is no need of a valuation certificate.
  • It is the prerogative of the board of directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to shares at such premium or not
  • In the absence of any restriction from any law in force, the revenue cannot question the charging of premium.
  • Any receipt can be taxable under section 56(1) of Income Tax Act,1961 only if it has some character of income.
  • The genuineness and identity of the depositor shall be established through the banking channels.

 

Can we use the amount received as Share premium for business?

As per Section 52(2) of the Companies Act, 2013, Securities Premium Account may be used for the purpose mentioned therein like, issue of bonus shares, writing off preliminary expenses, buy back of shares, etc.

If the securities premium account is used for other than the aforesaid purpose, then it shall be treated as reduction of share capital and the provisions of capital reduction will apply.

However, please note that the securities premium account and securities premium amount are two different things.

Securities Premium Account represents the premium shown on the liabilities side of the balance sheet.

Securities Premium Amount represents the amount of premium received in the form of Cash or other than Cash and is shown on the asset side of the balance sheet. This amount can be used for the main business of the company including for the purpose of acquiring land or any other assets.

 

 

FAQs on appointment / rotation / removal of Auditor under Companies Act, 2013 (Other than Government Company)

FAQs

First Auditors:

I have just incorporated a Company. When do I appoint the first Auditor of the Company and how?

  • First auditor shall be appointed by the Board within a period of 30 days from the date of registration of Company. E-form ADT-1 is required to be filed within 15 days from the date of appointment.
  • Following documents are to be attached alongwith ADT-1:
    1. Written consent from Auditor
    2. Certificate from the Auditor that he is not disqualified to be appointed
    3. Copy of the Board Resolution

What if the Board is not able to appoint the first Auditor within 30 days of incorporation?

  • If the Board fails to appoint, then it shall inform the members about the same. The members shall within a period of 90 days, at an extraordinary general meeting, appoint an auditor.

What would be tenure of first auditor?

  • First auditor, appointed as above, shall hold the office till the conclusion of first Annual General Meeting

Term of appointment of Auditor

The Auditors under the Companies Act, 1956 (Old Act) were appointed every year at the Annual General Meeting (AGM). They were appointed till the next conclusion of next AGM, and were reappointed, subject to their availability and certain conditions. What is the term of appointment of Auditor under Companies Act, 2013?

  • The Auditor shall hold the office from the conclusion of first Annual General Meeting till the conclusion of sixth Annual General Meeting subject to ratification of appointment by the members at every subsequent AGM.
  • Ratification of appointment of the Auditor is to be done by the members of the Company at every AGM.

What, if company fails to ratify?

  • If a company forgets to ratify the appointment of auditor in the subsequent AGM then there is no penal provision in the relevant section of the Act. The best part for this omission is that there is no requirement to file any e-form for ratification. But one should, nonetheless, take care of the same.

Whether e-form ADT-1 is required to be filed for ratification of the appointment of auditor?

  • There is no need to file ADT-1 at the time of ratification.
  • Note: As per Companies Amendment Bill, 2016, the concept of ratification has been withdrawn. If it is approved, there will be no need to ratify the appointment of auditor at every AGM by the members.

Is ADT-3 required to be filed after completion of the tenure of the auditor?

  • The purpose of Form ADT-3 is to intimate the ROC about the termination of the office of the auditor (whether by way of resignation or death of auditor) before the expiry of his/her tenure. ADT-3 is not required in following situations:
    1. If any new auditor (other than First Auditor) is appointed in the first AGM, no need to file ADT-3 as term of the First Auditor is only till the conclusion of first AGM. However, company shall file ADT-1 towards the appointment of new auditor appointed post the first AGM.
    2. Mr. A is appointed as auditor for 5 years. After completion of said 5 years, if Mr. B is appointed as auditor, no need to file ADT-3 for A. Company shall file ADT-1 for the appointment of B.

Casual Vacancy

The Statutory Auditors of our company have resigned. What is the procedure to appoint a new Auditor?

  • Casual vacancy to be filled by the Board within a period of 30 days.
  • If casual vacancy arises due to resignation of auditor then it shall be approved by the members within a period of 3 months from the date of appointment.
  • There is no need of members’ approval if casual vacancy arises due to reasons other than resignation. The reason may be death, etc but does not include removal.
  • The Auditor who has resigned, is required to file e-form ADT-3 within a period of 30 days from the date of resignation.
  • E-form ADT-1, towards appointment, is required to be filed within 15 days from the date of appointment, i.e. Board meeting held to fill casual vacancy. SRN of the e-form ADT-3 filed by the previous Auditor is to be mentioned in ADT-1 (appointment form of new Auditor). So, ADT-3 Shall be filed before ADT-1.

What would be tenure of auditor appointed in casual vacancy?

  • Auditor appointed in casual vacancy shall hold the office till the conclusion of next Annual General Meeting.

Whether the form filing is required at every type of appointment of auditor?

  • Yes, at every type of appointment i.e first auditor, casual vacancy or appointment at AGM,the Company shall file ADT-1 for such appointment.

Is Form ADT-3 is required to be filed in case of death of auditor?

  • As per Section 140 of the Companies Act, 2013, the Auditor who has resigned before the expiry of his tenure shall intimate to ROC in Form ADT-3. In case of casual vacancy arisen due to death of auditor, the Company should file Form ADT-3 with the death certificate of the auditor as the attachment. In case the death certificate has not been issued yet, the Company can file a declaration along with the obituary published in newspaper (if any) as the mandatory attachments to Form ADT-3. Subsequently, you can proceed with filing Form ADT-1 for the new auditor.

Rotation of Auditor

Is the concept of rotation of auditor applicable to every company?

No, the provisions pertaining to Rotation of Auditors are applicable to the following companies only:-

  • Every listed Company;
  • All unlisted public Companies having paid up share capital of rupees 10 crore or more;
  • Every private company having paid up share capital of rupees 20 crore of more;
  • All companies having public borrowings from bank, financial institutions or public deposit of rupees 50 crore or more.

What is the term for which an Auditor can be appointed in the company?

As per Section 139(2) of the Companies Act, 2013, the aforesaid categories of Companies have to mandatorily rotate their Auditors as follows:

  • An individual can be appointed as auditor for a term of five consecutive years;
  • An audit firm can be appointed as auditor for two terms of five consecutive years

After completion of aforesaid term auditor cannot be re-appointed as auditor of the same company for a period of five years.

Removal of Auditor

We have appointed the Auditor of the company for a term of 5 years. However, some differences have crept in and we want to remove the existing auditor?He is not resigning, nor giving audit report, what to do?

  • The only mechanism for removal of a Statutory Auditor appointed under the Act before expiry of the term, requires the prior approval of the Central Government (at present, the powers have been delegated to the jurisdictional Regional Director).
  • Special resolution of the company passed by the members is also required.
  • Auditor should be given suitable opportunity to make representation
  • MGT-14 to be filed w.r.t Special Resolution
  • File application in form ADT-2 alongwith the grounds of removal and other details, for Central Government approval.
  • INC-28 is to be filed within 30 days alongwith the copy of Central Govt. approval.