Companies Act, 2017 which was passed recently will have a huge impact on the Regulatory Proceedings of the country. It aims to encourage Corporate Governance and facilitate ease of doing business. Though many analyses have been made on the clauses and the legal nuances of the Act, however, little has been said on the impact of Companies Act, 2017 on Start-ups and SMEs, the main backbone of the country. Hence, in this article, I am trying to throw some light on how this new Regulation shall affect the entrepreneur community as a whole.

Government is really trying to make forming startup very easy

In the last few years, various amendments have been brought by the government to make registration process simpler. Companies Act, 2017 too is a step towards the same direction. Modification in Section 4, Section 7 and Section 12 have brought in the following changes-

• Now the proposed entities can have a broad-based Main object in the Memorandum of Association. In other words, objects of a company could state that the company can engage in any lawful act or activity or business without giving any specific objects. This will help start-ups to have a company which work in many domains rather than the erstwhile practice of forming a different company for a different object.
• Also instead of 60 days, now the name shall be reserved for just 20 days. Previously a lot of Affidavits had to be prepared and hence the Government gave time. Now that the Government has reduced the paperwork for incorporation and have allowed simple declaration instead of affidavits from the subscribers, it wants the start-up to act fast on this.
• Having a registered office is a time-consuming process and it might so happen that the negotiations can go on for some time. Hence, the government has increased the time limit for filing the documents for Registered office from 30 days to 60 days from the date of Registration

“Lets’ have a system where running business is easy”- seems to be the narrative of the Act

The previous regulations had many rules which were difficult to comply with small start-ups. Say, for example, if one had appointed an auditor for 5 years, they have to keep on ratifying the resolution every year in the AGM. Again the General Meetings has to be held in the city of Registered Office. In today’s age where entrepreneurs travel quite a lot and business models are totally online based this seems to be the reason why a lot of these meetings where only on papers. The government amending sections like 96, 100, 139, 153 and 168 have come up with some structural changes in this regards.

• Now every unlisted company can hold General Meeting (including Annual General Meeting) anywhere in India
• It has also proposed to omit the requirement related to ratification of appointment of auditors by members at every Annual General Meeting
• Now, one can even be appointed as Director without having DIN. The Government is expected to soon come up with a notification recognizing Pan or Adhar number as the DIN.
• If a director has to resign from office then he need not file DIR-11 as it has been made optional by the Act. Filing of DIR-12 by the company would solve the purpose.
• Now, one can be director of more than 20 companies as the Act clearly states that dormant companies shall not be included while calculating the list of 20 companies
• The Act has encouraged Board meeting through Video-Conferencing mode.
• To give a clear message that the Government is not on witch-hunt against the business houses penalties under various sections have been reduced

Focusing on Start-up Funding

Private Placement u/s 42 is a preferred route of Start-up Funding. The Government has come out with some much-needed clarification in this regards.

• Board of Directors of the Company shall identify persons to whom private placement is proposed and the company shall record the same
• The government has clarified that Private Placement Offer and application do not carry a right of renunciation. In other words, people who are offered shares can only accept it and nobody else.
• Previously it was seen application was issued to a person and subscription money was deposited by his company. This created lot of confusion. Now the Government has clarified that this Subscription money can only be paid by the person to whom application is issued by the Company.
• Company has to file Pas-3 within 15 days of date of allotment and can only utilize the money only the form has been filed. This is done so as to encourage corporate governance and proper compliance of the regulations.

The Companies Act, 2017 also allows more than 2 layers of Investment. This was very important as funded companies can now not only acquire start-ups but if need be, the later can also acquire entities and grow their business.

Also, sweat equity which is very common in the start-up ecosystem can now be issued before 1 year from the date of incorporation. Previously one had to wait for at least a year to issue such shares.

 

Comply or face Consequences

The Act also makes Annual Filing easy for small Private Limited Companies. Lot of modifications u/s 92, 93, 134, 403 have been done so as to facilitate ease of compliance at the same time strict against non-compliance.

• It is proposed to omit the requirement of MGT-9 to form a part of Board Report. Instead uploading the same in the website and attaching this link on the report would suffice.
• The Central Government should prescribe abridged form of Annual Return for OPC and Small Company
• One need not file any return with respect to changes in promoter’s and top ten shareholder’s stake
• One need not reproduce the disclosure reported in the Financial Statement again in the Board Report
• If you a habitual offender i.e. have defaulted in filings on two or more occasions then one need to pay twice the additional Government Fees or such higher amount as might be prescribed by the Government
• Similar to LLP, the Government plans to impose a penalty of Rs 100 per day if proper compliance in this regards is not done on time.

 

All in all lot of changes have been brought so at to create an environment where it is easy to form and operate a business. It seems that this Act would definitely encourage new entrepreneurs and improve India’s Ranking in ‘Ease of Doing Business’.