Compliance Guide: Post Incorporating a Private Company in India

Sakshi Bhatt

February 22, 2023

Compliance Guide: Post Incorporating a Private Company in India

Do you know that India ranked 63rd in ‘Doing Business 2020’: World Bank Report. In 2014, the Government of India launched an ambitious program of regulatory reforms aimed at making it easier to do business in India. India has emerged as one of the most attractive destinations not only for investments but also for doing business. India jumps 79 positions from 142nd (2014) to 63rd (2019) in 'World Bank's Ease of Doing Business Ranking 2020'. *

Presently, it is easier to commence a business in India, however, the Ministry of Corporate Affairs is taking a very strict approach for the non-compliances by the companies and number of  companies were closed by the Ministry of Corporate Affairs due to non-compliances during a year. Therefore, it is important for entrepreneurs to understand the legal aspect of post incorporation compliances of a company.

Overview of Indian Company Law

The Indian Company law is governed by the Companies Act, 2013 (the “Act”) and Ministry of Corporate Affairs is the regulatory body. The Act regulates the formation, functioning, dissolution of corporations or companies incorporated in India. Under the Act, one can easily incorporate a Private Limited Company, Public Limited Company and One Person Company. In a general sense, a private limited company is formed with two directors and two shareholders, whereas a public company is formed with three directors and seven shareholders and One Person Company is formed with a single person as a director and shareholder.

Post Incorporation Compliances for a Private Company in India

Generally, a private limited company is required to comply with certain basic requirements for commencing its business i.e. opening of bank account, obtaining Good and Service Tax (GST) registration or Import Export Code (IEC) and other applicable registrations depending upon the requirements of the business activities. On the contrary, most of the directors or entrepreneur fails to comply with legal compliances leading to hefty penalties and in extreme cases closure of companies by the ministry. A private limited company is required to adhere certain important compliances in accordance with the provisions of the Act, a summarized note on post incorporation compliances is as follows:

1. Convening of first meeting of Board of Directors 

A private limited company is required to hold a meeting of board of directors within a period of 30 (thirty) days from the date of incorporation of the company wherein certain agenda items like appointment of first statutory auditors, issuance of share certificate etc. are to be taken up by the company. 

2. Appointment of Statutory Auditor

Another important compliance for a private limited company is to appoint an individual or a firm (who are eligible to be appointed as an auditor) as a statutory auditor of the company within 30 (thirty) days from the date of incorporation of the company in accordance with the applicable provisions of the Act. 

3. Filing of form for Commencement of Business

A company cannot commence its business activities unless a declaration for commencement of business as per the provision of the Act, is filed within a period of 180 (One Hundred and Eighty) days from the date of incorporation of the company.  

A private limited company shall not commence any business or exercise any borrowing powers unless such declaration is filed with the Registrar of Companies. In order to comply with this requirement, the company is required to open a bank account and initial subscribers are required to deposit the subscription monies in accordance with the shareholding ratio between the subscribers as mentioned in the memorandum of association of the company. 

4. Issuance of share certificate and payment of stamp duty

A private limited company is required to deliver share certificates to the subscribers to the memorandum of association of the company within a period of two months from the date of incorporation. 

The stamp duty on the share certificates must be paid within a period of 30 (thirty) days from the date of issuance of share certificates in accordance with the provisions of Indian Stamp Act, 1899, However, the procedure for payment of stamp duty is prescribed by the respective state governments.

5. Corporate Stationery

It is important for a private limited company company to affix a board depicting companies name, registered office address, corporate identity number, telephone number, email id, website address, if any, outside of every office or place in which its business is carried on, in a conspicuous position and in legible letters. 

6. Annual Compliances under the Act

Every private limited company is mandatorily required to undertake certain annual compliances. Irrespective of the paid capital and turnover, every company is required to hold an annual general meeting within 6 (six) months from the close of every financial year and subsequently file the e-Form AOC-4 and e-Form MGT-7/7A with the Registrar of Companies within thirty and sixty days of the annual general meeting, respectively. It is pertinent to note that there is an extended timeline for holding the first annual general meeting of the company and it can be conducted at any time within nine months from the close of the first financial year.

7. Compliances under FEMA, RBI/FDI Reporting

Where the private limited company has foreign direct investment, the company is additionally required to file Form FC-GPR on FIRMS Portal within thirty days from the date of allotment of shares. To file the Form FC-GPR, the Company should first begin with creating and registering the Entity User and Business user on FIRMS Portal.

Further, as per the provisions of Foreign Exchange Management Act, 1999
(“FEMA, 1999”), every private company which has the foreign direct investment as on 31st day of March of the financial year shall also have to file the Annual Return of Assets and Liabilities (“FLA Return”) by 15th day of July of subsequent financial year on FLAIR portal of RBI.

In case of failure of complying with the above stated compliances, every officer of the company shall be liable of certain amount of penalty as specified under the applicable provisions of the Act and/or FEMA.

Moreover, a private limited company is required to comply with certain event-based compliances as and when the event occurs or on attaining certain thresholds pursuant to the provisions of the Companies Act, 2013 or FEMA, 1999 as the case may be.

Conclusion 

While starting your business, please keep in mind the famous legal maxim Ignorantia juris non excusat, which means "ignorance of law is not an excuse”. It is a legal principle holding that, a person who is unaware of a law may not escape liability for violating that law merely because one was unaware of its content.

Therefore, the directors and shareholders are required to ensure that all the applicable laws and compliances for a company registered in India are in order and should abide by the same to avoid any penalties.

Frequently asked questions

1. Can subscribers to the memorandum of association transfer his shares?

The subscriber to the memorandum of association can transfer his shares after introduction of the initial subscription capital into the bank account of the company.

2. How many meetings of board of directors are required to be convened by a private company?

A private company (other than an OPC) is required to conduct at-least 4 (four) meetings of the board of directors in a financial year and the gap between two meetings should not be more than 120 (One Hundred and Twenty) days.

3. What is the penalty for failure to complete the post incorporation compliances?

The penal provisions for every non-compliance under the Act is different. The penalty may vary from monetary fine to imprisonment and shall be levied on the company, the directors of the company and the person responsible under the Companies Act for the said non-compliance.

4. What if the board of directors fails to appoint the statutory auditors within 30 days of incorporation?

If a company fails to appoint the statutory auditors within 30 (thirty) days of incorporation, the statutory auditors can be appointed in the extraordinary general meeting of the shareholders of the company within 90 (ninety) days.

5. What are the different ways of introducing funds in the company?

Funds can be infused in the company by way of introduction of further share capital, issue of debentures, loan from banks and financial institutions, loan from directors and their relatives, external commercial borrowing etc.

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