New companies act, 2013 has addressed many issues and challenges faced by Startups and are to an extent positive for startups. The Companies Act, 2013 has received extreme reactions from the Corporate Sector. Generally players are happy to finally get a well structured and stringent regulatory mechanism. However, there still exists confusion and ambiguity among the existing companies regarding its implementation. In this article, we will put forth 10 things startups should know about Companies Act, 2013 .  However these provisions, only to a minor extent, enable the start-ups to get going, operate and exit businesses with ease. The Indian startups actually have a long way to go from here. This article will take you through important provisions of the new companies Act, 2013 which are going to impact the Indian startups.

1. One Person Company concept:

The start-ups will be able to commence a business as a ‘One Person Company’ and can be known as a private limited company which is a great move as in India most small businesses are started by one person and run as sole proprietorship.

2. Access to Crowd–funding:

Start-ups can now reach out for crowd funding or angel funding with up to 200 members.

3. Important Relaxations:

A “Small Company” having a paid-up capital of less than Rs 50 lakh or with a maximum turnover of Rs 2 crore has been given some relaxations like their financial statements need not include cash flow; only two board meetings are mandatory, one each in half of a calendar year; the annual return to the Registrar of Companies (ROC) can be signed by the director of the company, thus a practicing company secretary is not mandatory for the initial period. The act also allows self-approved mergers between two small companies.

4. Digital signature certificate mandatory for getting director identification number:

For the company registration, earlier the DIN forms were filed by professionals after certifying the forms with their DSCs. The new Act, however, has made it mandatory to obtain the DSC for obtaining the DIN. Hence, any person wishing to obtain a DIN has to apply for a DSC first.  There has also been increase in the DIN fees. The requirement of the DSC Certification is more on the stringent side.

5. Penal provisions for non-compliance: In the New Companies Act, penalties for non-compliance for certain provisions have been increased significantly. Some of these are highlighted below:

• For regular non compliance like not filing return etc can lead to criminal prosecution.
• Every director will be prohibited to become director for a period of five years in any other company if the default company fails to
• File returns for consecutive three years
• Fail to pay dividend

Moreover, the directors cannot even exit the company from the position of director till the returns are filed. Below is the summary of important penal provisions:

• Filing of annual returns: If not done, then the concerned officers can face jail or/and fine of Rs 50,000 to Rs 5,00,000
• AGM: If not conducted then fine of Rs 1,00,000 and/or Rs 5,000 per day for the officers
• Proper discharge of duties by the Director: If not done, then jail or fine of Rs 1,00,000 to Rs 5,00,000
• Maintaining minutes of Board Meetings: If not done, then fine of Rs 25,000 and/or jail upto 2 years

So startup companies should ensure they strictly comply with regulations to avoid troubles in future.

6. A company can’t give loan to another company:

As per the New Companies Act, a company is prohibited to lend to another company where the directors and shareholders are common. For example, Company A has good revenue and is making a profit. Founders of Company A start another company, Company B. Now Company B cannot borrow from Company A, as both companies have common shareholders. Since the penal provision of non-compliance is extremely high, companies have to take a serious note of this.

7. Valuation of shares mandatory to raise capital Separate bank account for keeping Investment money:

From April 2014 onwards any Indian startup who wishes to raise capital must get its shares valued by an independent valuer appointed by the Ministry of Corporate Affairs. Certified chartered accountants or investment bankers are likely to be authorized to issue such valuation certificates. The new Act has made it mandatory for startups to have a separate current bank account for receiving any investment, with the money required to be remitted back to investors if shares are not allotted within 60 days

8. CIN Number mandatory:

 Every private limited company will have to mention its 21 digit CIN number in its letter-heads, invoices and other documents.

9. One director to be a resident:

It will be difficult for NRIs to incorporate companies in India, as at least one director has to be a resident Indian from now on. 10. Virtual office concept made difficult: Using virtual office has been made difficult as multiple companies may not be allowed to share the same registered office address as per the new provisions. To conclude:  The government should not bracket a company which is raising Rs 50 lakh with one who is raising Rs 50 crore. There should be separate rules issued for startups under the new Act. The strict provisions of the new Companies Act 2013, are likely to delay investments, increase the cost of compliance and prove to be a hindrance in registering a  new company. At the same time the easier rules for mergers, the concept of a small company, and the concept of independent directors will provide better growth opportunity for the startups. Hence, if we analyze the provisions in detail, we will find that most of the exemptions of the private limited company have been withdrawn. On one hand, this has increased the compliance requirements for start-ups and made it more stringent and complicated to some extent. On the other hand, however, this will definitely instill a right spirit of discipline and vigilance in the business management. Income tax return filing for F/Y 2013-14 has started. Please click here to visit our ITR filing page.