Forming a Company in India: A Comprehensive Guide

What is a Company?

A Company is an artificial person that is created by law and has a separate legal entity, perpetual succession, common seal, and limited liability. It is a voluntary association of people who come together to contribute to the capital of the company to do business. In general, the capital of a company is divided into small parts known as shares, where the ownership is transferable subject to certain terms and conditions.

According to Section 2 (20) of the Companies Act 2013, “Company means a company incorporated under this act or any previous Company Law.”

Formation of a Company

Establishing a company in India involves adherence to the regulations outlined in The Companies Act of 2013. The most prevalent corporate structure is the limited company, with unlimited companies being relatively uncommon. The process involves registering the Memorandum of Association (MOA) and Articles of Association (AOA) with the State Registrar of Companies in the state where the primary office is situated.

Section 3 of the Companies Act, 2013 outlines the basic requirements of forming a company as follows:

• Involvement of 7 or more people can form a Public company who subscribe their names to the memorandum and register the company for any lawful purpose.
• 2 or more people can form a Private company.
• One person can form a One-Person Company (OPC).

Incorporating a Company

1. Approval of Name

The initial step is obtaining approval for the company’s name from the Registrar of Companies (ROC). Specific conditions such as uniqueness and adherence to naming conventions applies here. Once approved, the name is valid for six months, during which the Memorandum of Association (MOA) and Articles of Association (AOA) must be filed.

• Memorandum of Association and Articles of Association:

These documents are crucial for company’s incorporation. The Memorandum outlines the company’s constitution, objectives, and scope, while the Articles detail internal management rules. The ROC issues a Certificate of Incorporation after receiving these documents and the requisite registration fee.

• Certificate of Commencement for Public Companies:

Public companies, if opting to invite public subscriptions, need to issue a prospectus filed with the ROC. Upon fulfilling these requirements, the ROC issues a Certificate of Commencement of Business, allowing the company to start its operations.

• Miscellaneous Documents:

Several documents and forms, including a declaration of compliance, particulars of directors, and power of attorney, must be submitted along with the Memorandum and Articles. Tax registration, including PAN and TAN, is also necessary.

2. Rules and Procedures

Adherence to the Companies (Central Government) General Rules and Forms, 1956 is mandatory. The submission is made to the Registrar of Companies along with specific enclosures and fees based on the nominal capital.

3. Managerial Remuneration

Rules governing managerial remuneration, including restrictions on expatriates, are outlined. The appointment of a Managing Director requires residency in India, and public companies have limitations on remuneration.

4. Submission Process

All necessary documents, including the Memorandum and Articles, declaration, and relevant forms, must be presented to the Registrar of Companies within three months from the date of name approval.

Key Points:

• The declaration must be signed by an authorized individual, such as an advocate, attorney, or chartered accountant.
• The Registrar ensures compliance with section 33(1) and (2) and verifies documents for stamp duty and other legal requirements.
• Defects in documents must be rectified, and the submission must be made within the specified time frame.
• The Registrar accepts computer laser-printed documents for registration, provided they meet all requirements.

5. Fee Payable

The fee for company registration is payable either in cash or through a bank draft/pay order treasury challan. The payment should be made in the name of the Registrar of Companies of the state where the company is proposed to be registered, as per Schedule X.

Reporting Requirements

1. Annual Accounts:

• Under Indian Company Law, there is a flexibility in maintaining books of accounts. While specific books are not prescribed, it mandates maintaining accounts on an accrual basis and following the double-entry system. The accounts should provide a true and fair view of the company’s financial status.
• The law requires companies to maintain proper books of account, covering details such as money transactions, sales and purchases, and assets and liabilities. For companies involved in manufacturing, processing, or mining, additional particulars related to material or labor utilization are necessary.
• Annual accounts must be drawn up from the date of incorporation up to the Annual General Meeting (AGM) date, not exceeding 15 months. An extension of the accounting period up to 18 months is possible with the Registrar of Companies’ permission. These accounts must be filed with the ROC within 30 days from the AGM date.

2. Books of Accounts:

• Companies are obligated to maintain proper books of accounts, covering various financial aspects. Certain classes of companies may be required to preserve additional particulars, as specified by the Central Government. Financial statements must comply with accounting standards issued by the Institute of Chartered Accountants of India, with any deviations requiring disclosure.
• Management is responsible for preparing financial statements on a going concern basis, selecting appropriate accounting policies, and making reasonable and prudent judgments and estimates. Any material departure from accounting standards must be explained in the financial statements.

3. Annual Return:

Every company with share capital must file an annual return with the ROC within 60 days from the AGM date or, if no AGM is held, within 60 days of the last date when the AGM should have taken place.

Certain Accounting Issues

1. Depreciation:

Companies can use depreciation rates based on asset classes, applying either the straight-line method or the reducing balance method. Minimum rates of depreciation are prescribed, but companies can use a higher rate based on a genuine technological evaluation, with adequate disclosure in the annual accounts.

2. Dividend:

While there is no limit on the dividend rate, certain conditions govern the computation of profits available for distribution. Generally, dividends can only be paid from profits of the financial year after making provisions for depreciation. Distribution can also be from accumulated profits.

3. Repatriation of Profits:

Companies must retain a maximum of 10% of profits as reserves before declaring dividends. These reserves can be converted into equity through bonus shares. Once investment approval is granted, dividends are freely repatriable.

4. Imposition of Taxes:

Domestic companies are taxed at 35.875%, while foreign companies are taxed at 41%, including a surcharge of 2.5%. Minimum Alternate Tax (MAT) applies if the income tax liability is less than 7.5% of book profits. Companies also face a dividend distribution tax of 12.8125% (including a surcharge of 2.5%) on distributed dividends.

Companies must withhold taxes on certain payments and from non-residents as per domestic laws or tax treaties.

Permission for Foreign Companies

Foreign companies engaged in manufacturing and trading abroad can open branch offices in India with permission from the Reserve Bank of India. The purposes include representing the parent company, conducting research, engaging in export and import trading, and fostering technical and financial collaboration.

Conclusion

The process of forming a company in India involves adherence to the Companies Act of 2013, with the most common corporate form being the limited company. Foreign companies engaging in activities in India need approval from the Reserve Bank of India and can open branch offices for various purposes. The incorporation process includes name approval, submission of the Memorandum of Association (MOA) and Articles of Association (AOA) and obtaining the Certificate of Incorporation.

Additionally, companies must comply with reporting requirements, maintaining proper books of accounts, filing annual accounts and returns with the Registrar of Companies, and addressing various accounting issues such as depreciation, dividends, and repatriation of profits. The taxation framework imposes rates on domestic and foreign companies, including Minimum Alternate Tax and Dividend Distribution Tax.

Understanding and navigating these legal and financial intricacies is crucial for businesses seeking to establish themselves in India, ensuring compliance with regulatory frameworks and fostering a solid foundation for sustainable operations. The comprehensive nature of reporting requirements and taxation underscores the importance of meticulous financial management and legal adherence for companies operating in the Indian business landscape.

Frequently Asked Questions (FAQs)

1. What is the primary corporate structure in India, and how is it established?

The prevalent corporate structure is the limited company, established by registering the Memorandum and Articles of Association with the State Registrar of Companies.

2. What permissions are required for foreign companies looking to operate in India?

Foreign companies engaging in manufacturing and trading abroad can open branch offices in India with permission from the Reserve Bank of India for various purposes.

3. What are the key steps in the company incorporation process?

The process includes obtaining approval for the company’s name, filing the Memorandum and Articles of Association, and receiving the Certificate of Incorporation from the Registrar of Companies.

4. What are the reporting requirements for companies in India?

Companies must file annual accounts and returns with the Registrar of Companies within specified time frames, and maintain proper books of accounts as per Indian company law.

5. How are taxation and financial issues addressed for companies operating in India?

Taxation includes rates for domestic and foreign companies, Minimum Alternate Tax (MAT), and dividend distribution tax. Financial issues such as depreciation, dividends, and repatriation of profits are also regulated.