Know the rational points to be kept in mind for stepping into corporate world

Company form of organization is well recognized Corporate Entity and developed form of business set up throughout the globe. The Companies Act, 2013 has brought major changes by increasing regulatory framework along with higher Professional Accountability and expertise.

Apart from well recognition by law, establishment of Company is highly preferred by the start-ups because of the ease of raising funds with premium pricing of shares and diffused risk of liability along with higher creditability enjoyed over other formations and set ups. Limited Companies are one of those picked entity by the investor and venture capitalist which provide them elasticity to account for transparency in accounts and operations of entity in which they are investing their resources. Uninterrupted existence irrespective of change in the ownership and shareholding helps investors to be stay assured for the return and constant growth of the Company.

Entering into this form of Company, an entrepreneur should always look into various dimensions linked with the Company such as the risk involved, management responsibility and legislative requirements during the incorporation as well as post incorporation. Companies Act mandates number of requirements to be complied with during the continuation of operations of the company.

Phases of Planning and flawless entry into Corporate World and running of the company is covered here in nutshell in order support the rational decision of opting the Incorporation of Company and look after the best interest of owners and stakeholders of the company in it.

Aspects to be considered for Decision making:

  • Prior to stepping into business, thorough analysis of pros and cons shall be done in order to rationalise the decision of choosing the right form of organisation suitable to the requirement whether long term or for short term.
  • The owner must be aware of the complexity and significance of every phase of the life cycle of the entity, so as to step forward with deliberated correct course of action.
  • How well the organisation is able to yield out of the investment made is to be considered along with the return of the owners.
  • The scope of growth at future date along with the expansion scope shall be evaluated.
  • Know about the exit option from the organisation in case of any erroneous steps are taken because of negligence.

Know the Incorporation Procedural requirements to be taken care:

While registering as a Private Limited Company or Public Limited Company, the basic provisional requirements are to be complied which are enumerated below:

  •  
  • Minimum number of shareholders and directors are to be appointed while incorporation and also to be maintained during the continuity of the company operations.
  • In addition to the below mentioned requirements with regards to the appointment of Members and Directors, minimum one Resident Director shall be appointed in the Company while incorporation.

Company

Members

Directors

Private Limited Company

2 to 200

2 - 15

Public Limited Company

3 to unlimited

3 - 15

One Person Company

1 (individual)

1 - 15


  • While appointment of Directors, the prime concern shall be reflected towards the qualification of the proposed candidature to be appointed as Director in the Company.
  • In case of Public Listed Company, the composition of Board shall be such that optimum combination of Executive and Non-Executive Directors along with appointment of Independent Directors and a Woman Director.
  • Furthermore, where there is involvement and investment of the non-resident Indian, the provisions of the FEMA and RBI shall be complied with care.
  • Object and Name of the company shall be chosen and selected after complying with the regulations prescribed in this regards under Companies Act, 2013
  • Moreover, the provisions, in certain cases, mandate the in-principle approval of the Statutory Authorities such as RBI, SEBI, IRDA, etc. for choosing the name or the activities. (E.g. where the name contains word “Finance” as a part of it, in-principle approval of RBI is required. The approval of SEBI will be required to act as a Stock Broker).
  • The requisite documents including the Registered address office proof, consent and affidavit by Directors &/or Subscribers shall be submitted in the prescribed format in order to ensure the hassle-free incorporation process.

Capital to be introduced in Company:

Raising funds through Equity:

Funds from equity are permanent in nature unlike the Preference Share Capital, Debentures or other external sources of fundraising. While issuing the capital from equity, it is essential to consider the dilution of ownership & control over the Company.

Classification of Share Capital:

The share capital of the company can be classified in mainly four heads as followed:

Authorised Share Capital:

The maximum capital a company can raise by an issue of share capital at any time during the existence of the company is referred as Authorised capital, which can be increased at future date after consent of the members. Any fees or stamp duty payable by the company during and after incorporation is decided on the basis of Authorised Capital of the company. The number of Authorised Shares is to be mentioned in the Memorandum of Association of the Company.

Issued Share Capital:

The shares offered by the company for allotment and subscription are known as Issued Shares. The addressee of the offer of allotment has right to subscribe the share. However, the shares to be issued shall be authorised by the Capital clause of the MoA, where total number of share issues shall not be exceeding the Authorised Share of Company.

Subscribed Share Capital:

It is the part of issued share capital, which is agreed to be contributed by the members of the company. The members are liable to the extent total capital subscribed by them.

Paid-up Share Capital:

Paid-up share capital is that part of subscribed capital, which the shareholders have already paid to the company. The amount of paid up capital is reduced from the total liability of the members towards company.

Initial Capital (at the time of incorporation):

Law requires minimum amount of Authorised Capital to be kept at the time of incorporation.  The requirement of minimum authorised capital for Public Limited Company is Rupees. Five Lakhs only (Rs. 500,000/-) whereas for the Private Limited Company is Rupees One Lakh only (Rs. 100,000/-).

However, no minimum capital requirement with respect to paid-up capital is prescribed.

Further issue of Capital:

Whenever the need of capital arises in the company, further issue of capital can be made to the extent of Authorised Share Capital. However, as stated earlier, the authorised capital can be increased as required and on the same, additional stamp duty shall also be paid to MCA.

Further, issue of share can be made through Right Issue i.e. offer to existing members of the Company, Private Placement or other modes including Public Issue in case of Public Limited Company.

One should always consider a return to the equity holders is not expense for the Company rather it is distribution of profit in form of dividend. In case of Private Limited Company, the offer to public for subscribing the shares of the company is not allowed as well as the restriction on transfer of shares is prescribed by including the conditions in the definition of Private Limited Company under the Act.

Raising funds from External Sources:

External sources of finance for the company are Term Loans, Debentures, Trade Credits, Bank Overdrafts, Venture Capital, Convertible Securities etc., which are considered as debt to the company.

The funds raised from External Sources are charge against profit as the predefined rate of interest is to be paid irrespective of the amount of profit earned by the Company. Further, they are not permanent in nature as the amount is redeemable after certain period. Raising funds from external sources do not dilute the ownership of members rather it helps to extract the best resources for the growth of the Company as well as the Industry as whole.

For easy availability of funds from external organisation, proper project planning along with rational presentation of the investment needs, forecast of the returns from operations and all aspects required which should cover the growth expectation in sensible and balanced manner.

Venture Capitalist and Term Loan providers seek to ensure their assured and timely return from the Company in which they are lending their money for longer term hence it is necessary to present the financial planning in well and concise manner in order to build investors’ trust starting from the initial stage of funding.

Optimal balance of equity and debt is advisable to be maintained in order to be cost efficient.

Benefits to Investors and owners:

The investor and owners expect the finest returns from the contribution in the company. Where funders from external sources gets the fixed returns in form of interest, the shareholders being the owners of the company do not get the regular return as the dividend distribution to the equity shareholder is not compulsory in nature.

The dividend is distributed after reservation of profit for operational purpose as well as future project requirements. In initial years, where the businesses expect lower profit, possibility of irregular return is expected. However, with the growth of the organisation, higher profit availability leads to higher returns to shareholder.

Statutory Requirements & Compliance:

The company is a form of organisation, which comes into existence by following the procedure prescribed and the same law governs the operational as well as management requirements. The division of ownership and management as well as perpetual succession require stringent compliance requirements.

This statutory requirements & compliances allow the operations to be transparent and help the existence of company to be continued irrespective of change in management or ownership. Company ensuring timely compliance avoids additional fees and penalties as well as maintains the active status of the company, which also aids in higher creditability of the company.

Company Law requires compliance of various provisions where mandatory appointment of auditor is crucial. In addition of the same, accounting, preparation of financial statements, etc. shall be as per the provisions laid down. Secretarial standards in respect of conducting Board Meeting as well as General Meeting shall be complied with.

Further, maintenance of various records such as Minutes of Board Meeting & General Meeting; Register with regards to shareholding pattern, list of Directors, Related Party Interest of the Directors, copy of MoA & AoA, Statutory Registers etc. at the registered office address of the company in order to enable the access by members of the company as and when required.

Apart from above, regular intimation to Registrar of Companies for any changes in the Directors &/or Auditor of the company; Creation, modification and satisfaction of charges, intimation regarding the special resolutions passed at general meeting of the company. The approval of RoC is to be accorded for carrying the changes of clause in MoA and AoA of the company.

The annual compliance requirement of filing AOC - 4 and MGT - 7 shall be fulfilled on regular basis, continuous default of which may lead to disqualification of directors preventing them from appointment or reappointment in other companies.

Bottom Lines:

As the incorporation, registration, management and operation of Limited Companies requires attention towards the provisions laid down for governing respective procedures and actions, which is troublesome for the entrepreneurs to know whether to start or not and if yes, when to start with the company form of organisation.

Every form of organisation is paired with number of advantages and disadvantages. Requirement and compatibility of each form varies with involvement of new facts and different activities.

Hence, this crucial question requires the involvement of Practising Professional at various stages including the incorporation procedure or during the continuity of operations of Company.

The Government of India promotes the ease of commencement of business in India where the enormous support for quick incorporation procedure has given. This allows the applicant having complete documentation to swiftly incorporate the company within few days.

 

Shrijay Sheth 
on 25 September 2017
Published in Corporate Law
Views : 235
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