Reduction of Share Capital

In this article, it is discussed about “Reduction of Share Capital” and its procedure under section 66 of the Companies Act, 2013 in line with NCLT Rules, 2016 and recent case law.

On 07th December, 2016, Ministry of Corporate Affairs (MCA) has vide its Commencement Notification notified various sections of Companies Act, 2013 which includes arbitration, compromise, arrangements and reconstruction and winding up companies which has come into force with effect from 15th December, 2016.

The Section 66 which is the governing provision for Reduction of Share Capital of a company is one amongst those sections notified on 07th December, 2016.

Immediately, thereafter, MCA has further, notified the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016 on 15th December, 2016.

What is Reduction of Capital…..?

Reduction of share capital is regarded as one of the process of decreasing company’s share capital (apart from Redemption of preference shares and Buy Back of shares which are governed by other provisions separately). The Reduction of Share Capital means reduction of issued, subscribed and paid up share capital of the company. In simple words it can be regarded as ‘Cancellation of Uncalled Capital’ i.e. part of subscribed share capital.

  • The need of reducing share capital may arise in various situations, few are listed below:
  • Returning of surplus to shareholders;
  • Eliminating losses, which may be preventing the payment of dividends;
  • May be as part of scheme of compromise or arrangements;
  • To simply capital structure;

Previously, reduction of share capital was governed by section 100 to 104 of the Companies Act, 1956. As per the old act, it was subjected to the confirmation of court, under new Act 2013, the said powers of court has been transferred to Tribunal (NCLT).

Points to remember

  1. A company constituted with limited liability by shares or guarantee and having share capital is alone entitled to reduce its liability of members.
  2. It should have the power under its Articles of Association to do so. If the articles do not contain any provision for reduction of capital, the articles must first be altered so as to give such power.
  3. Reduction is regarded as internal restructuring of company, therefore decision of majority will prevail by way of special resolution.
  4. The reduction effected by such resolution must be confirmed by the National Company Law Tribunal (‘Tribunal’)
  5. No capital reduction can be undertaken if the company is in arrears in the repayment of any deposits (including interest payable thereon) accepted by it.
  6. Reduction takes effect on registration of the documents with the Registrar of Companies.
  7. Reduction is different from Diminution of shares which is regarded as cancellation of unsubscribed share capital.
  8. Nothing in this section shall apply to buy back of its own securities u/s 68 of the Companies Act, 2013
  9. Offenses under this section are compoundable under section 441 of the Companies Act, 2013.

Difference Between Private Limited Company Vs LLP

While starting up a company one has to decide which business organization they want to incorporate and carry on. The choice of business organization is very important to give shape to your business motive. Here, if one has to choose between the Private limited company registration and LLP one can see the advantages and the difference so as to choose what’s best for them.

Private company are those companies where the all shares of the company are held privately. They can operate their business themselves or hire directors to manage the company on their behalf. It is a business entity which is privately held by some share holders. It limits the owner liability to the extent of their shareholding and limits the no. of shareholders to 50 only. It also restricts shareholders to trade shares publically.

Advantages:

  • The liability of the shareholders is limited to the extent of their shareholding their personal assets are not taken to repay the debts of the company.  Although this has one exception where there is fraud committed in relation to the company it will negate the owner’s liability protection.
  • There is restricted trade of shares, It is an advantage to the shareholders who do not want to sell the shares to the outsiders. So the risk of hostile takeover is low.
  • It has perpetual succession and has an independent identity which is different from its owners or shareholders. It means that the company will still and continue to exist even if the members die or ceases to be a member. The change in shareholders will not bring any effect on the identity of the company. It will be the same with same privileges, immunities, estates and possessions. It will continue to exist till wound up is there according to the Companies Act 2013 or any relevant act.
  • It is a Separate legal entity.  It has its own assets and liability is a legal entity which can be sued or sue or can hold and dispose of property of the company. It is capable of owing the funds and other properties. It is a legal person under whose name the company’s property is vested and is not of the shareholders.
  • There are few shareholders the decisions taken are quick and prompt. They are governed by the Companies Act 2013 and have to follow the procedures and disclosure norms under the act.
  • Income tax act 1961 provides a lower tax burden and rates for the companies compared to other type of business.
  • A company being a legal entity has the power to sue in its name and can be sued by others.

LLP

LLP Registration is limited liability partnership. It is new form of business where both partnership and corporation exists. Here the partnership is with limited liability. It is registered under LLP Act, 2008 and with Ministry of corporate affairs.

Advantages of LLP:

  • LLP can be formed by any amount of capital. There is no need for minimum capital for LLB. It is so set up hassle free and not burdensome on the owners.
  • It requires a minimum of 2 partners and there is no limit on the maximum number of partners of the LLP.
  • The cost of registering LLP is low as compared to a company.
  • All limited companies have to get their accounts audited but in case of LLP hther is no such requirement. Although it is required to audit when the contributions of LLP exceeds Rs. 25 lakh or annual turnover exceeds Rs. 40 lakh.
  • The LLP has to file only two i.e. annual return and statement of accounts and solvency.
  • LLP is treated in par with the partnership firm. The provision of dividend distribution tax is not payable on LLP. Also under Section 40(b) deductions are allowed on the interest given to partners, any payment of salary bonus commission or remuneration.

Problems with LLP:

LLP can be bind by the act of one partner without the other partner i.e. one partner can make all other liable or bind them.

They cannot raise money from public.

Distinction Between a Public Company and a Private Company

DISTINCTION BETWEEN A PUBLIC COMPANY AND A PRIVATE COMPANY

Following are the main points of difference between a Public Company and a Private Company:-

  1. Minimum Paid-up Capital : A company to be Incorporated as a Private Company must have a minimum paid-up capital of Rs. 1,00,000, whereas a Public Company must have a minimum paid-up capital of Rs. 5,00,000.
  2. Minimum number of members : Minimum number of members required to form a private company is 2, whereas a Public Company requires at least 7 members.
  3. Maximum number of members : Maximum number of members in a Private Company is restricted to 50, there is no restriction of maximum number of members in a Public Company.
  4. Transerferability of shares : There is complete restriction on the transferability of the shares of a Private Company through its Articles of Association , whereas there is no restriction on the transferability of the shares of a Public company

5 .Issue of Prospectus : A Private Company is prohibited from inviting the public for subscription of its shares, i.e. a Private Company cannot issue Prospectus, whereas a Public Company is free to invite public for subscription i.e., a Public Company can issue a Prospectus.

  1. Number of Directors : A Private Company may have 2 directors to manage the affairs of the company, whereas a Public Company must have at least 3 directors.
  2. Consent of the directors : There is no need to give the consent by the directors of a Private Company, whereas the Directors of a Public Company must have file with the Registrar a consent to act as Director of the company.
  3. Qualification shares : The Directors of a Private Company need not sign an undertaking to acquire the qualification shares, whereas the Directors of a Public Company are required to sign an undertaking to acquire the qualification shares of the public Company
    9. Commencement of Business : A Private Company can commence its business immediately after its incorporation, whereas a Public Company cannot start its business until a Certificate to commencement of business is issued to it.
  4. Shares Warrants : A Private Company cannot issue Share Warrants against its fully paid shares, Whereas a Private Company can issue Share Warrants against its fully paid up shares.
  5. Further issue of shares : A Private Company need not offer the further issue of shares to its existing share – holders, whereas a Public Company has to offer the further issue of shares to its existing share – holders as right shares. Further issue of shares can only be offer to the general public with the approval of the existing share – holders in the general meeting of the share – holders only.
  6. Statutory meeting : A Private Company has no obligation to call the Statutory Meeting of the member, whereas of Public Company must call its statutory Meeting and file Statutory Report with the Register of Companies.
  7. Quorum : The quorum in the case of a Private Company is TWO members present personally, whereas in the case of a Public Company FIVE members must be present personally to constitute quorum. However, the Articles of Association may provide and number of members more than the required under the Act.
  8. Managerial remuneration : Total managerial remuneration in the case of a Public Company cannot exceed 11% of the net profits, and in case of inadequate profits a maximum of Rs. 87,500 can be paid. Whereas these restrictions do not apply on a Private Company.
  9. Special privileges : A Private Company enjoys some special privileges, which are not available to a Public Company.

BUSINESS SETUP

1. What qualifies as a “Startup” for the purpose of Government schemes?
An entity (Private Limited Company or Registered Partnership Firm or Limited Liability Partnership) shall be considered a “Startup” –
a) Upto 5 years from the date of its incorporation/ registration, and
b) If its turnover for any of the financial years has not exceeded INR 25 crore, and
c) It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

The entity should not have been formed by splitting up or reconstruction of a business already in existence.
A proprietorship or a public limited company is not eligible as startup. A one person company, being a private limited company is entitled to be recognized as a ‘startup’.For additional information, refer notification G.S.R. 180(E) dated February 17, 2016.

2. How does a Startup obtain benefits under various Government schemes including the ones announced in the Action Plan on January 16, 2016?

For availing various benefits (except tax and IPR related benefits i.e. action points #4, #9, #10 and #11 of the Startup India Action Plan), an entity would be required to be recognized as a Startup by applying on Startup India Mobile App/ Portal.
In order to obtain tax and IPR related benefits, a Startup shall be required to be certified as an eligible business from the Inter-Ministerial Board of Certification.

3. For how long would recognition as a “Startup” be valid?

An entity would cease to be a ‘startup’ upon expiry of:
a) 5 years from the date of its incorporation/ registration, OR
b) If its turnover for any of the financial years has exceeded INR 25 crore; OR
Startups would be required to intimate DIPP of any such cases within a period of 21 days.

4. Can an existing entity register itself as a “Startup” on the Startup India Portal and Mobile App?

Yes, an existing entity that meets the criteria as indicated in response to Question 1 can visit the Startup India Portal and Mobile App and get itself recognized for various benefits. The tax benefits proposed under the Finance Bill 2016 will be available from 01-04-2016.

5. What is the timeframe for obtaining certificate of recognition as a “Startup” in case an entity already exists?

The process of registration in such cases shall be real time and the certificate of recognition would be issued immediately upon successful submission of the application.

6. Do you help with Startup India registration?

Yes, we assist with application. The grant of registration depends on the government approval. The registration is not guaranteed.

7. What are your fees to assist in Startup India registration?

Our professional fees is Rs 5000 for application irrespective whether its approved or not.

8. What is government fees for the startup India registration?

There is no fees for the same.

9. Can a foreign subsidiary be registered under Startup India Scheme?

No, a foreign subsidiary cannot registered under startup India scheme. But a company with foreign shareholders and directors can be registered under startup India scheme.

Can convertible notes be issued to Indian Residents or Indian Company?

Convertible notes to Indian residents:

The concept of convertible notes was introduced in June 2016 when , the Ministry of Corporate Affairs (MCA) amended theCompanies (Acceptance of Deposits) Rules, 2014 (Rules) exempting convertible notes from the ambit of deposits, and thereby allowing recognised startups to issue convertible notes in tranches exceeding Rs25 lakhs to prospective investors, without having to comply with the slew of requirements mandated by the Rules.

The Companies Act does not specifically mention that whether it ca be issued to Indian Residents or Not. Going by that we are of the vies that the CN can be issued to Indian Residents.

Compliances when CN are issued to Indian Residents

The objective of convertible notes is to allow startups issue convertible instruments without having to go through a lot of compliances. The procedure to issue convertible notes is simple and does not involve any filing. ( No need to comply with private placement procedures)

The steps are:

  • Convene a board meeting to approve the issue of CN
  • Convene a EOGM to issue offer letter and approve CN agreement (No need to file MGT 14)
  • Issue the CN to the investors.

The advantages of CN are:

  • No private placement compliances required
  • No valuation report required
  • Optionally convertible

Accounting treatment for convertible notes:

Convertible Notes are recognised as debt in the books until they are converted or repaid.

UNION BUDGET – FY 2020 – 21

Finance Minister Nirmala Sitharaman has presented the union budget 2020-2021. She has unveiled reforms that aim at bringing a boost to the Indian Economy with the combination of short term, medium-term and long term measures. 

The Finance Minister has structured the union budget according to the theme ‘ease of living’. There are quite a few initiatives that have been made in the budget to match this theme. The budget revolves around three ideas which are – Aspirational India, Economic development and a caring society. 

Read through details of the Union Budget for the year 2020-21 to get better clarity on the same.

Pros and Cons of a Limited Liability Partnership (LLP) registration versus a Private Limited registration for Indian startups

The selection of a business entity is among the primary lawful choice taken by an Entrepreneur while starting a new business. With the presentation of the Limited Liability Partnership Act and the Companies Act, 2013, more decisions of business entities are currently accessible. In this way, it is vital for the Entrepreneur or Promoter to comprehend the upsides and downsides of every one of the business element and pick the correct one. In this article, we look at those kinds of elements viz.LLP versus Private Limited Company.

  • I) Registration
    •  LLP
      Limited liability partnership will be enlisted with the Ministry of Corporate Affairs under the Limited Liability Partnership Act, 2008.
    •  Private Limited CompanyPrivate Limited company will be registered with the Ministry of Corporate Affairs under the Companies Act, 2013.
  • ii)Name of the Entity
    •  LLP The name given by the founders must be approved by the Registrar of Company. The name proposed for approval should not be similar to existing LLPs and Companies or similar to a brand name or a trademark. The name should be unique and must be easily distinguishable from other LLPs and Companies. The name of the business will end with the words “Limited Liability Partnership” or “LLP”.
    •  Private Limited Company
      The name selection and approval process is similar for private limited company and LLP. The name of the entity will end with the words “Private Limited”.
  • iii) Legal Status of the Entity
    •  LLP
      LLP is a separate legal entity registered under the LLP Act, 2008.The one partner of the LLP not liable for the acts of the other partners done without consent. For example if Sam borrows money in the name of the LLP without the consent or knowledge of Peter who is the partners. Peter will not be liable to the amount due.
    •  Private Limited CompanyPrivate Limited Company is a separate legal entity registered under the Companies Act, 2013. The Directors and Shareholders of a Private Limited Company are not personally liable for the liabilities of the Company.
  • iv)Member(s) Liability
    •  LLP
      Partners have limited liability and are at liable only to the extent of their contribution to the LLP.
    •  Private Limited CompanyInvestors have limited liability and are liable only to the extent of their share capital.
  • v) Minimum Number of Members
    •  LLP At least two people are required to start an LLP.
    •  Private Limited CompanyAt least two people are required to start a Private Limited Company.
  • vi)Maximum Number of Members
    •  LLP
      A LLP can have unlimited number of Partners.
    •  Private Limited CompanyA Private Limited Company can only have a maximum of 200 shareholders.
  • vii)Foreign Ownership
    •  LLP
      Foreign national and foreign companies are permitted to invest into an LLP with prior permission from the RBI and Foreign Investment Promotion Board (FIPB) approval.
    •  Private Limited CompanyForeign national and foreign companies are allowed to invest in a private limited under automatic route and approval route.
  • viii)Transferability
    •  LLP
      Ownership can be transferred.
    •  Private Limited CompanyOwnership can be transferred by way of share transfer.
  • ix)Existence or Survivability
    •  LLPPresence of a LLP isn’t reliant on the Partners.Could be wound up willfully or by an Order of the Company Law Board.
    •  Private Limited CompanyPresence of a Private Limited Company isn’t reliant on the Directors or Shareholders. Could be would up just willfully or by Regulatory Authorities.
  • x)Taxation
    •  LLP
      LLP profits are taxed at 30% plus surcharge and cess as applicable.
      Dividend Distribution Tax (DDT) is not applicable for LLPS
    •  Private Limited CompanyCompanies having turnover less than Rs 250 Cr will be taxes at 25% plus cess and Companies having turnover more than 250 Cr will be taxes at 30% plus cess. DDT is application while distributing dividend.
  • xi) Annual Statutory Meetings
    •  LLP
      No requirements to conduct annual statutory meetings.
    •  Private Limited CompanyPrivate limited company must hold a minimum of 4 Board meetings in a financial year and 1 General Meetings in a financial year.
  • xii) Annual Filings
    •  LLPLLP must form 11, form 8 with MCA every year within the due dates specified under the law.
    •  Private Limited CompanyPrivate Limited Company must record Annual Accounts and Annual Return with the Registrar of Companies every year.
  • xiii) Registration Cost

Basic Legal aspects of a startup in india – Every entrepreneur should know

Before starting a new business, an entrepreneur needs to have the knowledge on various aspects of business. One such segment is the law of the land. Multiple laws can be applicable for a business such as company’s law, shops and commercial establishment, professional tax, provident fund, Goods and Service tax (GST), customs Act etc. Not all of them will be applicable for all business, you need to identify which laws are applicable for your nature of business and ensure that the company complies with them to avoid running into legal problems in the future. Let’s have a look at the legal aspect that govern a start-up business in India.

Choosing the right type of business

The first decision to make is to decide what type of company should you register as. The answer to this can be different depending on the nature of business, the long-term vision and other factors scale and funding requirements. You can choose from ‘partnership firm’‘Limited Liability partnership’‘private Limited’ or ‘one person company’ or even a sole proprietorship. Choosing the most appropriate business vehicle for one’s venture goes a long way in affecting visibility, sustainability, and profitability. So, choosing your brand will depend on long-term goals and vision. Every type of business has a separate set of laws that you have to decide to keep the existing legal frameworks in mind.

State Laws

A business must have a register office address. There are 29 states and 7 union territories in India and if your business is registered in any one of these states, you will also have to follow the state laws which may be applicable to your business. Shops and commercial establishment Act, Employee Professional Tax Act, Stamp act, Labour laws can change from state to state. For example, the stamp duty payment you make to register a partnership firm in Kerala will be different from Karnataka or Tamil Nadu.

Intellectual property law (IP)

Patent, trademark and copyright are of prime importance for your business. Every business is unique and is run by individual who are not thinking the same way or developing the same product. It’s important to protect your brand, patent your invention and copyright your content. It’s critical that you file the right patent/trademark/copyright claims. This will prevent theft.

Tax Laws

You can never run away from taxes, whether you like it or not. So, it’s important to understand what all taxes are applicable to your business and make such payments within the due date. It’s also important to note that certain taxes laws are applicable only which your business crosses a certain turnover, in this case you don’t have to pay when it’s not required. For example, in certain cases, GST is applicable only if the turnover of the company is more than Rs 20 lakhs. Undertaking the law of the land can go a long way saving cost by not paying taxes when not required and by avoiding any penalties by paying on time, when required.

Book Keeping

Maintaining you books of accounts monthly or such intervals can help you analyze the cost associated to each segment and help improve the performance of the company. Financial data at the right time can help make important decision which can increase profitability and reduce cost.

The company will also have to comply with governing bodies such as SEBI, RBI, IRDA, ICAI, ICSI etc depending on whether your business activity is governed by such bodies.

We at IndiaStartup will assist you with all legal aspects of starting your business

Basic requirements to register a LLP in India

1) Minimum partners are required in an LLP, out of which at least one partners must be a resident Indian. Indian Resident means any person who has stayed in India for more than 182 days in the previous calendar year.

2) Foreign Investment should be allowed in that Industry

3) After the LLP is set up and bank account is opened. The foreign investment which comes into India needs to be reported to the Reserve Bank of India (RBI).

Documents Required to register a LLP in India:

If you want to register a wholly owned subsidiary, then we need the holding company’s documents

  • Foreign Company Documents:
    •  The registration certificate of the foreign company
    •  Memorandum and Articles of the foreign company
    •  A board resolution Authorizing the foreign company to invest in India
  • Foreign Director
    •  Passport
    •  Utility Bill
    •  Drivers License
    •  Passport Size photographs for directors (4 each)
  • Indian Resident Director:
    •  Pan copy is mandatory for the Indian Resident
    •  ID Proof – Driver’s License/Passport/Voter’s ID
    •  Address Proof – Bank Statement/Telephone bill
  • Registered Office documents:
    •  Address Proof of place of business (Electricity Bill or Water Bill with full address)
    •  No Objection Letter from property owner of the office

FDI Reporting to Reserve Bank of India:

Every time a foreign company or a foreign individual invests money into India by setting up a business or investing in an existing business, FDI reporting to Foreign Exchange management department or RBI is mandatory.

The foreign company or foreign national investing in the Indian company must transfer the funds in foreign currency to the Indian Bank account. While doing the bank transfer, you will have to select the purpose code as “Investment” or “Equity investment” or anything similar.

Once the funds reach the Indian bank, the bank will issue a Foreign Inward Remittance Certificate (FIRC). With which we have to do the FDI reporting to the RBI

Post Incorporation Licenses:

After the LLP is registered, it may have to get certain licenses deepening on the nature and size of business. Here are the list of licenses which is required if a company is registered in Bangalore, Karnataka

1) Karnataka Shops and commercial establishment – All companies registered must get this license from the department of labour.

2) Professional Tax enrolment – All companies registered must get this license from the department of professional tax.

3) Employee Professional Tax – (required only when salary payable is more than Rs 15,000 per month to employees)

4) Import Export License – (Required if you are importing or exporting)

5) GST registration – (Required if Company is into export of goods or service, turnover is more than Rs 20 lakhs per year)

Basic requirements to register a private limited company in India

1) Minimum two shareholders are required to incorporate a Private Limited Company in India. The shareholders can either be an Foreign individual or a foreign company.

2) Minimum of two directors are required out of whom one should be a resident in India. Please note that the requirement is resident of India (Not Indian National), which means a foreign national who is an Indian resident is eligible. Indian Resident means any person who has stayed in India for more than 182 days in the previous calendar year.

3) Foreign Investment should be allowed in that Industry.

4) After the company is set up and bank account is opened. The foreign investment which comes into India needs to be reported to the Reserve Bank of India (RBI).

Documents Required to register a private limited Company:

If you want to register a wholly owned subsidiary, then we need the holding company’s documents

  • Foreign Company Documents:
    •  The registration certificate of the foreign company
    •  Memorandum and Articles of the foreign company
    •  A board resolution Authorizing the foreign company to invest in India
  • Foreign Director
    •  Passport
    •  Utility Bill
    •  Drivers License
    •  Passport Size photographs for directors (4 each)
  • Indian Resident Director:
    •  Pan copy is mandatory for the Indian Resident
    •  ID Proof – Driver’s License/Passport/Voter’s ID
    •  Address Proof – Bank Statement/Telephone bill
  • Registered Office documents:
    •  Address Proof of place of business (Electricity Bill or Water Bill with full address)
    •  No Objection Letter from property owner of the office

FDI Reporting to Reserve Bank of India:

Every time a foreign company or a foreign individual invests money into India by setting up a business or investing in an existing business, FDI reporting to Foreign Exchange management department or RBI is mandatory.

The foreign company or foreign national investing in the Indian company must transfer the funds in foreign currency to the Indian Bank account. While doing the bank transfer, you will have to select the purpose code as “Investment” or “Equity investment” or anything similar.

Once the funds reach the Indian bank, the bank will issue a Foreign Inward Remittance Certificate (FIRC). With which we can do FC-GPR filing with RBI.

Advance reporting needs to be filed within 30 days from the date of receipt of the funds. and FC-GPR filing has to be done within 60 days from the date of receipt of funds.

Post Incorporation Licenses:

After the company is registered, it may have to get certain licenses deepening on the nature and size of business. Here are the list of licenses which is required if a company is registered in Bangalore, Karnataka

1) Karnataka Shops and commercial establishment – All companies registered must get this license from the department of labour.

2) Professional Tax enrolment – All companies registered must get this license from the department of professional tax.

3) Employee Professional Tax – (required only when salary payable is more than Rs 15,000 per month to employees)

4) Import Export License – (Required if you are importing or exporting)

5) GST registration – (Required if Company is into export of goods or service, turnover is more than Rs 20 lakhs per year)