All posts by Prasanna Nagure

Dormant Company- Most Important Aspects

The Entrepreneurs/Promoters conceive an idea to start a business which later on flourishes. These potential ideas, for reasons such as market situations, idea being ahead of its time, etc. may not work as envisioned. So, it becomes imperative for the entrepreneur to hold on for dust to settle and carry the business after some point of time. The Companies may want to stop trading for a short while or wait for market conditions to move in their favour and restart at a later stage. Hence the idea of Dormant Company was brought in legal provisions.

It can also be a useful tool for those companies which have a future project or want to hold an asset or intellectual property. The Companies which are not generating revenues can cut down their business/ administrative expenditure by obtaining dormant status.

Concept of Dormant Company in Other Parts of the Globe

In the United Kingdom, a dormant company is a Company whose transactions have been limited to payment for shares taken by subscribers to the memorandum of association, fees paid to the Registrar of Companies for a change of company name, the re-registration of a company and filing annual returns and payment made in respect of civil penalties imposed by the Registrar of Companies for delivering accounts to the Registrar after the statutory time allowed for filing.

In Singapore, a dormant company is defined by two authorities: ACRA and IRAS. For ACRA the determining factor for dormancy is the lack of transactions. For IRAS, a company that does not generate income is considered dormant. The companies deemed dormant by the authorities can be exempted from filing annual financials and submitting tax return. For the latter, a waiver has to be issued by IRAS.

Following are the answers to most relevant questions pertaining to Dormant Company in India.

  1. What is a Dormant Company under Indian Laws?

  2. As per Section 455 (1) of the Companies Act, 2013

    “Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

    Explanation.—For the purposes of this section,—

    1. “inactive company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years;

    2. “Significant accounting transaction” means any transaction other than—

      1. Payment of fees by a company to the Registrar;

      2. Payments made by it to fulfil the requirements of this Act or any other law;

      3. Allotment of shares to fulfil the requirements of this Act; and

      4. Payments for maintenance of its office and records.

  3. How to obtain status of Dormant Company?

    1. A Company in its general meeting is required to pass a special resolution with consent of at least ¾th of the majority in value.

    2. After satisfying the conditions mentioned in the section 455 and rule 3 and 6, the company may apply for obtaining the status (Certificate) of dormant company. The application to obtain dormant status shall be filed with the Registrar in Form MSC-1.

    3. the registrar after being satisfied shall provide the certificate in Form MSC-2 allowing the status of a Dormant Company to the applicant.

  4. What are the compliances for a Dormant Company?

    1. No. of Board Meetings: As per Section 173(5) Dormant Company shall be deemed to have complied with the provisions of this section 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.

    2. Minimum number of Directors: The Dormant Company shall maintain minimum no. of Directors, i.e. 3 in case of public company, 2 in case of private company and 1 in case of One Person Company (OPC).

    3. Annual Return: In comparison with the conventional annual filing where the active companies are required to file two detailed forms annually, a Dormant Company is required to file one simple form annually indicating financial position duly audited by a Chartered Accountant in practice in Form MSC-3 within a period of thirty days from the end of each financial year.

    4. Other Compliances: Further, the Company also needs to file requisite returns under Income Tax Act, 1961 and Goods and Services Tax, 2017.

    5. Most of compliances under Companies Act, 2013 are event based and other compliances are to be fulfilled on regular intervals. A dormant company would have no/ very less compliances as it would have no/ fewer event based activities.

  5. Can a Dormant company make allotment of shares? Also, can there be a change in Directors of such Company?

  6. Yes, pursuant to Rule 7 of The Companies (Miscellaneous) Rules, 2014, a Dormant Company can make allotment of shares and effect a change in directorship as well. The Company shall report with ROC on such allotment or change in Directorship in a timely manner.

  7. Can application for Dormant Status be filed by a company carrying on business which has not filed Financial Statement and Annual returns?

  8. Section 455 (1) of the Companies Act, 2013:

    “Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

    Brief analysis: “such a company or an inactive company” may make an application for obtaining the status of a dormant company.

    And explanation to Section 455 (1) states that

    “inactive company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed Financial Statements and Annual Returns during the last two financial years.

    So, an inactive company is one which has not filed Financial Statement and Annual Returns for last two financial years and therefore, can apply for Dormant status.

    Though technically, the application for Dormant status can be filed by a company carrying on business but has not filed Financial Statement and Annual Returns for last two financial years but it also depends on the satisfaction of the jurisdictional RoC. The grounds should justify the allowability and the applications are decided on merits.

    Question for the readers: In such a case, if application made under this criterion, whether the ROC would require filing of financial statements and annual returns for past period? For the very fact that the annual filings were not done for past period, the applicant was eligible to make application under this criteria?

  9. How long can a company stay Dormant?

  10. As per Rule 8 of The Companies (Miscellaneous) Rules, 2014, a company can continue with ‘Dormant status’ for a period of

  11. Can a Dormant company apply for strike off?

  12. As per Section 248(1)(C), a Company which has made an application to ROC for obtaining ‘Dormant’ status cannot apply for strike off. The company needs to obtain ‘Active’ status first to apply for strike off.

  13. How to obtain Active status?

  14. The application shall be made in e-form MSC-4 along with return in e-form MSC-3 in respect of the Financial Year in which the application for obtaining the status of ‘active’ company is being filed.

    Conclusion: The option of obtaining ‘Dormant’ status is a tool to be utilized by inactive companies who don’t want to go for strike off and want to wait for their ideas to flourish eventually with minimal statutory compliances.

Extraordinary General Meeting: Venue and Quorum Requirement for Private Companies

Indian Companies Act empowers Board of Directors to take most of the business decisions. However, there are certain matters which affect the shareholders which can only be approved in Shareholders meeting. Some of the matters which can be proceeded with only after shareholders’ approval in their meeting are:

  • Increase in Authorized Capital,
  • Issue of shares through private/ preferential allotment,
  • Borrowing or Investments by company beyond certain limit;
  • Alteration of Articles of Association etc.

Shareholders meetings are held at any place in India. The quorum requires shareholders to be personally present at the meeting. These are certain constraints to convene and hold meeting with proper quorum at a venue, especially when shareholders are non-residents, they may not be available in India.

Due to this there were several amendments to the Companies Act, 2013 (Act) brought in by the Ministry of Corporate Affairs to ease out these constraints. These have been discussed as below.

Venue of EGM

As per Section 100:

The Board may, whenever it deems fit, call an extraordinary general meeting of the company. [Provided that an extraordinary general meeting of the company, other than that of the wholly owned subsidiary of a company incorporated outside India, shall be held at a place within India]

This amendment brought in a greater comfort to wholly owned subsidiaries of Foreign Company to conduct EGM even outside India.

Quorum for EGM

As per Section 103(1) (b), in case of a private company, two members personally present, shall be the quorum for a meeting of the company.

A member can appoint a proxy in case he is unable to attend however such proxy shall not counted for quorum. Without quorum, it will not be considered as a valid meeting and therefore, business can’t be transacted.

Relaxation from MCA to Private Companies

To overcome the above problem concerning quorum, MCA vide notification dated 5th June 2015 has specified that provisions in section 103 will not apply to a private limited company if Articles of the Company do not constrain the members to be personally present. So, a private limited Company may amend its Articles in a manner which allows proxy to be counted towards the quorum.

Sample Clause: “Two Members present in person or proxy shall be a quorum for a General Meeting. No business shall be transacted at any General Meeting unless a quorum of Members is present at the time when the meeting proceeds to business.”

Below is an easy reference table where Venue shall be any place in India and Quorum requirement shall be as under:

Sr. No EGM Quorum
1.

Indian Company where shareholders are individuals

Two members Personally present

2.

Indian Company where one shareholder is individual and the other is corporate shareholder

Individual shareholder and Authorized representative of corporate Shareholder need to be present

3

Indian Company which is Subsidiary company of Foreign company where one  shareholder is Indian Individual  and the other is Foreign Individual

Two members Personally present.

In case of Foreign Individual he can either be present at the meeting personally or

A proxy can be appointed by Foreign Individual though a Proxy wouldn’t be counted for Quorum unless a company should have in its Articles, a clause which recognizes appointment of Proxy and counting him for Quorum for EGM

(Pursuant MCA Exemption notification to Private companies date 05th June 2015)

4

Indian Company which is Subsidiary company of Foreign company where  shareholder are Individuals- Indian Corporate and Foreign Individual

Same as above

 

Indian Company which is wholly owned Subsidiary Company of Foreign Company can hold meeting outside India. Two members personally present shall be the quorum (Nominee shareholder and Authorized representative) and proxy may also be counted for quorum if Articles provides so.

A proxy wouldn’t be counted for quorum unless a company should have in its Articles, a clause which recognizes appointment of Proxy and counting him for Quorum for shareholders’ meeting.

Conclusion:

The Companies now, can take decisions at a much faster pace. The constraints of venue and availability wouldn’t prove to be hindrance where time is of the essence as meetings can be held anywhere in India or in case of wholly owned Subsidiary Company of Foreign Company -outside India.

Source:

A Brief on Employee Stock Options Plan (ESOP) in India by a Private Limited Company

An option is a right to purchase stock of a company sometime in the future for a stated price. It is a cashless perquisite which focuses on retaining key employees.

Who ESOP can be offered to:

  • Directors, employees, officers.
  • It can’t be offered to Promoters or Directors who directly or indirectly hold 10% shares in the company.
  • It can’t be offered to non-employees but can be offered to Directors, officers or employees of the holding or the subsidiary company.

Process of ESOP

  • The scheme of ESOP is required to be approved by shareholders in their General meeting.
  • The scheme contains details such as the identified employees to whom ESOP shall be offered, Valuation of shares, no of shares.

 

 

 

 

Valuation

Valuation of shares shall be done at the time of “grant of Option” by registered valuer and “exercise of option” by Merchant Banker. Therefore, valuation is to be done every time when the options are granted and /or exercised. Valuation not older than six months will be considered valid.

Expenses involved for Issuance ESOP

Apart from dilution in shareholding of promoters, the company should keep the following expenses in mind:

  • Fees payable to Registered valuer and the Merchant Banker for Valuation of shares
  • Fees payable to consultant for implementation of ESOP.
  • Administration cost throughout it’s tenure (can be an insider as well)

Exit options

  • IPO
  • To Strategic buyer / Investor, etc
  • Company buyback
  • Selling to an external buyer, subject to the Articles of Association

Trends in ESOP in India:

Indian companies are giving stock options to senior management — the CEO, the CXOs and those who drive growth. Among unlisted companies, majority of them grant options at an estimated fair value and only 25 per cent at face value.

Companies have a clause in their ESOP Scheme which says employees will be able to exercise their options only after a liquidity event, such as an IPO, buyback or strategic sale.

You can click on the below link to read our detailed blog on ESOP :

Employee Stock Option Plan under Companies Act 2013 for unlisted Companies

Liaison Office/ Branch Office VIS-À-VIS Wholly owned Subsidiary (WOS)

The choice of business form entirely depends on the end goals to be achieved. We have earlier dealt with the topic India-entry-basics.

A foreign entity planning to enter into Indian markets has options such as to open a Liaison office/Branch office or to establish a Wholly Owned Subsidiary.  Following analysis will help you understand:

 

A. Formation:

Branch/Liaison office: The documentation and the time required for establishing a Branch/Liaison office is more. There are profitability and Net worth conditions to be fulfilled by Liaison office/ Branch office. Parent Company should have a profitable track record during immediately preceding three years in the home country and the net worth as per latest audited Balance Sheet should not be less than USD 50,000/- and USD 100000 for opening a Liaison office and Branch office respectively.

Wholly owned subsidiary: A WOS through automatic route are much quicker to form as compared to forming a Liaison office/Branch office due to simplified procedure of incorporation. Generally, there is no profitability and Net worth conditions to be fulfilled.

 

B. Restriction in operation / activities

Branch office: The branch office can’t undertake manufacturing directly or indirectly. It is permitted to undertake activities Import/Export of Goods, providing professional/ consultancy services, research work, representing and acting as buying/selling agent for parent company etc.

Liason Office: A Liaison office is not allowed to earn income in India. Permitted activities for Liaison office are representing parent company, Promotion of Import/export, financial and technical collaboration.

A Wholly Owned Subsidiary can undertake any legal activity authorized by its charter. However, it is subject to sectoral caps applicable on industries. FDI is generally free (automatic route) for almost all the sectors baring those under approval route, for eg. Defence, Railways, etc.

 

C. Taxability and repatriation

The liaison office is not subject to Income Tax (as it is not allowed to earn income) although it has to file information in Form 49C with the Income Tax Department.

The Branch shall be liable to Indian Income tax and it can repatriate its profits subject to payment of tax. The branch office is taxed at 40%

The Wholly Owned subsidiary is subject Indian Income Tax, as it’s an entity incorporated in India. It is currently taxed at 25% upto a gross turnover of INR 2500 million beyond which the tax rate is @ 30%.

 

D. Convenience of closing it down

The Branch and Liaison office can be closed by only filing closure application with RBI through AD Category I Bank and it’s not needed to go for Winding up. A liaison office cannot acquire immovable property in India although it can take property on lease. A Branch office, on the other  hand is allowed to acquire assets including immovable property in India. The Branch office shall have to liquidate the assets before applying for closing.

A wholly owned subsidiary shall have to go for lengthy winding up process. Winding up generally takes a minimum of 6 months and may take much longer depending on the complexity and the type of assets it own.

There is also a much simpler mode to close down a company provided it meets certain requirement (Section 248(2) of the Companies Act, 2013). Two important eligibility criteria for strike off are

  • not doing business for last 2 years, and
  • does not have any assets and liabilities.

To know more about Strike off, please visit this link Strike off.

 

F. How expensive it is to close down and approximate time taken

The time and costs involved in closure of branch/ liaison office are lesser as compared to Winding up of a company in India.

However, the closure of a non-operational (having no assets and liabilities) wholly owned subsidiary are simpler and happens faster via Strike off.

To know more about the ways to close down a branch / liaison office, please read Closure of Liason Office / Branch Office

 

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. bsamrishindia.com Blog on Types of Entities

 

 

Registering a Liaison Office in India

A. What is a Liaison office?

Liaison office is an office set up by foreign entity (Parent Company) in India which acts as a channel of communication between the principal place of business or Head Office of the foreign entity (Parent Company).

Liaison office is not allowed to earn income in India; it has to meet all its expenses of Indian office through remittances from the Head office.

 

B. Features of Liaison Office

  • The name of Liaison office shall be the same as Parent Company
  • The regulatory authority is Reserve Bank of India. RBI Approval is required for setting up a Liaison Office.
  • Permission to set up such offices is initially granted for a period of 3 years. And this may be extended from time to time by an “AD Category I bank”.
  • The liaison office is not treated to be a distinct entity from its parent company. The parent company can be held liable for liability of Liaison office.
  • Permitted activities include representing parent company, Promotion of Import/export, financial and technical collaboration.
  • A Liaison Office cannot acquire immovable property in India although it can take property on lease.

 

C. Purpose of Liaison office

  • It’s a tool used by foreign companies to understand Indian market before it makes the decision to invest in India.
  • Based on its research it may take decision whether to incorporate a subsidiary or not.
  • It’s also easier and faster to close at any time as compared to WOS (Wholly Owned Subsidiary).

 

D. Pre-requisites for setting up (Parent Company)

  • Parent Company shall have a profitable track record during immediately preceding three years in the home country.
  • Its net worth as per latest audited Balance Sheet should not be less than USD 50,000/-.

 

E. How to set up a Liaison Office?

  • Application to RBI can be made for Sectors in which 100% FDI is permissible. Sectors in which 100% FDI is not permissible such application are considered by RBI in consultation with Ministry of Finance.
  • The applicant shall make application in form FNC to Authorized Dealer Category –I bank (a dealer having banking license) along with documents such as Charter of the Parent Company, Parent company’s banker’s report and other relevant documents as may be required.
  • An authorised representative is needed as point of contact between the parent company and Indian authorities. An authorised representative can be appointed through Power of Attorney / Board Resolution.
  • We suggest the applicant to have the same bank as an authorised dealer which is also the bank for parent company.

Upon registration, the RBI grants UIN (Unique Registration Number) to the Liaison Office.

 

F. Application to the Registrar of Companies

The Liaison Office of the foreign parent company shall, within thirty days of the establishment of its place of business in India, deliver to the Registrar of Companies for registration in form FC-1 along with copy of RBI Approval and other requisite documents.

MCA grants FCRN (Foreign Company Registration Number) to the liaison Office as an Identification upon registration.

 

G. Registration with State Police Authorities

A person from China, Hong Kong etc opening a liaison office in India shall have to register with the concerned State Police Authorities as well. Copy of approval letter for these ‘persons’ shall be marked by the AD Category-I bank to the Ministry of Home Affairs, Internal Security Division-I, Government of India, New Delhi.

 

H. Taxation and remittances of Profits

The Liaison office in India is not liable to any pay income tax as it is not allowed to earn any income. It is required to file information in Form 49C with the Income Tax Department.

 

I. Applicable Comliances

Upon registration the Liaison Office shall obtain PAN, TAN and such other License/registration as may be necessary.

  • Maintenance of Books of Account and getting Annual Accounts audited
  • Filling of Annual Activity Certificate with RBI
  • Filling of Annual Return and Balance sheet with Registrar of Companies
  • Intimating any change in Constitution/ Directors of Parent Company to RBI & ROC
  • Intimating each and every change in the Liaison office to RBI & ROC

NOTE: Additional place of business can be started after approval is taken form RBI.

 

Source: Notification No. FEMA 22/2000-RB dated May 3, 2000

 

 

 

Registering a Branch office in India

A. What is a Branch office?

The Branch office is setup by a foreign company (Parent Company) in India to carry out the branch activity for its business. As opposed to Liaison office, the branch office of the foreign company is allowed to earn revenue from the Indian Branch office.  It has to meet its expenditure from funds of its head office or its own revenue.

 

B. Features of Branch Office

  • The name of the branch shall be the same as Parent company name
  • The regulatory body is Reserve Bank of India. RBI approval is required for setting up a Branch Office.
  • Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by an “AD Category I bank”.
  • The branch office is not treated to be a distinct entity from its parent company. The parent company can be held liable for liability of Branch office.
  • Permitted Activities: Import/Export of Goods, providing professional/ consultancy services, research work, representing and acting as buying/selling agent for parent company, rendering tech support for the products of parent company. The branch office cannot undertake manufacturing however it can outsource it to Indian manufacturers.
  • A Branch office is allowed to acquire assets including immovable property in India.

 

C. Purpose of Branch Office

  • It’s a tool used by foreign companies to understand Indian market before it makes the decision to invest in India.
  • Based on its research it may take decision whether to incorporate a subsidiary or not.
  • Minimal Compliances as compared to Wholly Owned Subsidiaries (WOS).
  • Branch Offices also easier and faster to close at any time as compared to WOS.

 

D. Conditions for setting up (Parent Company)

  • Parent Company shall have a profitable track record during immediately preceding three years in the home country.
  • Parent company’s Net worth as per Latest Audited Balance Sheet not be less than USD 1,00,000/-.

 

E. How to set up a Branch Office?

Application to RBI can be made for Sectors in which 100% FDI is permissible. Sectors in which 100% FDI is not permissible such application is considered by RBI in consultation with Ministry of Finance.

  • The applicant shall make application in form FNC to Authorized Dealer Category –I bank (a dealer having banking license).
  • An authorized representative is needed as point of contact between the parent company and Indian authorities. An authorized representative can be appointed through Power of Attorney/ Board resolution.
  • It shall attach documents such as Charter of the Parent Company, Parent company’s banker’s report and other relevant documents as may be required.
  • We suggest the applicant to have the same bank (if possible) as an authorised dealer bank which is also the bank for parent company.

Upon registration, the RBI grants UIN (Unique Registration Number) to the branch office.

 

F. Application to Registrar of Companies (Ministry of Corporate Affairs)

The branch office of the foreign parent company shall, within thirty days of the establishment of its place of business in India, deliver to the Registrar of Companies for registration in form FC-1 along with the requisite documents.

MCA grants FCRN (Foreign Company Registration Number) to the branch as an Identification upon registration.

 

G. Registration with State Police Authorities

A person from China, Hong Kong etc opening a branch office in India shall have to register with the concerned State Police Authorities as well. Copy of approval letter for these ‘persons’ shall be marked by the AD Category-I bank to the Ministry of Home Affairs, Internal Security Division-I, Government of India, New Delhi.

 

H. Taxation and Remittances of Profits

The Branch office in India shall liable to pay income tax. The branch office is taxed at 40% plus Cess (for Assessment year 2018-19). Branch office can remit profits earned by it to its parent company after paying applicable tax.

 

I. Applicable Compliances

Upon registration the Branch office shall obtain PAN, TAN and such other License/registration as may be necessary.

  • Maintenance of Books of Account and getting Annual Accounts audited
  • Filling of Annual Activity Certificate with RBI
  • Filling of Annual Return and Balance sheet with Registrar of Companies
  • Intimating any change in constitution/ Directors of Parent Company to RBI & ROC
  • Intimating each and every change in the Branch office to RBI & ROC

Note: Additional place of business can be started after approval is taken from RBI.

 

Source: Notification No. FEMA 22(R)/2016-RB dated March 31, 2016