Govt brings Stricter Rules for starting new business

Have you recently incorporated your own Private Limited Company or are you in the process of doing so? Then you must take cognizance of the new regulations that has just been announced for starting new business otherwise chances are that the Government can impose a fine on you of up to Rs 1, 50, 000 or even shut down your business!

Govt brings Stricter Rules for starting new business

The Ministry of Corporate Affairs have recently brought Companies (Amendment) Ordinance, 2019 which succeeds Companies (Amendment) Ordinance, 2018 and have brought host of changes among which are changes is Section 10 A and Section 12 of the Act are quite important as both of them will have a huge impact on Starting new Business. These changes will be effective from 2nd November 2018, and so if your startups have been incorporated on or after 2nd November, 2018 then you shall be under scrutiny of these new laws.

Insertion of new section 10A

This seems to be an old wine in new bottle. A similar type of provision existed way back in 2015 when Companies had to file INC-21 before commencing any business activity. The Ordinance puts the restriction on every company having share capital to not to commence its business or exercise borrowing powers unless the directors file a declaration within a period of 180 days from the date of incorporation in a prescribed form ie INC 20 A, to the effect that every subscriber to the memorandum has paid the value of the shares as agreed for and the registered office is verified by filing necessary returns with the Registrar. The reason that the MCA might have introduced this particular guidelines seems to be due to the fact that till now many promoters were not paying the initial subscription amount at all and getting away as there was no specific rule in this regards. 

Main Requirements for Filing Form INC 20A:

  • The Subscribers has paid the share subscription amount to the Company
  • That the Company has obtained the regulatory approval required to be obtained for commencement of business for business activities which are specially regulated by other sectoral regulators like SEBI, RBI, IRDA etc. This are not for all but only the Companies where it is necessary like NBFCs.
  • That the form is certified by a Chartered Accountant, Cost Accountant or Company Secretary who are in practice

How to pay the Subscription amount?

There is no specific rules in this regards. Amount can be paid to company by the subscribers in cash provided it is below the limit set by the IT Department, so having lesser amount of paid up capital will help you to better comply with this section. However, for better Corporate Governance it is always advisable to deposit the subscription amount to company bank Account as soon as Bank Account of newly incorporated company is opened.

Penalty for Non-compliance

In case you choose to ignore the rules or somehow miss it then it can be very costly. The law states that if any default is made in complying with the requirements of this section, the company shall be liable to a penalty of fifty thousand rupees and every officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues but not exceeding an amount of one lakh rupees. Further, failure to comply with this Section may be an additional ground for Registrar to strike off of the name of the company.

Changes in Section 12

The Registrar is now empowered to physical verification of the registered office on reasonable cause to believe that no business or operations is being carried out by the company. In case of any non- compliance under this section in respect of having such an office in place is found, the same may also be an additional ground for Registrar to strike off of the name of the company.

This rule might have been introduced to curb the practice of opening shell companies which are used for money laundering and naturally have no place of doing business. It should also have impact on companies which operate from a virtual office and have no registered office at all.

Hence, it is very important for companies to be very careful while registering their startups so as to avoid long term consequences. 

 

If this article has helped you or if you have any query in this regards, feel free to send us the query below, and we shall be happy to assist.

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