Aug 10, 2014

Companies Act 2013- A set-back toward easing the process of starting a business in India

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ndia currently ranks 179 in the World Bank’s Doing Business 2014 report on the ease of starting business in India. The crucial part of the report is the incredible time taken for setting up the business i.e. 27 days. Though setting up business requires various steps of be undertaken but the registration of the company is the most important part of the process. Moreover, being the first step towards setting up business, any delay in it, would cumulate the delays further.

 

Before the introduction of Companies Act 2013 the expectations were ripe that the new law would definitely give a fresh outlook into the time consuming issues connected with the incorporation of company and will certainly bring forth a radically improved process of incorporation. But to the dismay of all , instead of rationalizing the process, Companies Act 2013 has provided for increased procedural requirement for incorporating a company which has further complicated the process and addednumber of days in the setting up of a company.

The Companies Act 2013 in comparison to Act of 1956 provides for various new requirement towards incorporating a company. A glimpse of said additional requirement along with theirpossible impact on the entire process is summarized below.

Incorporation Process New requirements under Companies Act 2013 Impact
Obtaining Director Identification Number (DIN) for Director Every director has to obtain Digital Signatures before applying for the DIN. Lead to consumption of additional time and cost.
Notarized Verification form to be filed along with the DIN application. Lead to consumption of additional time and cost.
Identity proof and Address proof to be certified by Professional Good Move – Would reduce mala fied applications.
Approval of Name
  • New requirements added in Name guidelines
  • Additional documents will be required in following cases:
    • No objection certificate required in case the key word used in the proposed name is the name of a person other than the name(s) of the promoters or their close blood relatives,
    • In case the name includes the name of relatives, the proof of relation shall be attached and it shall be mandatory to furnish the significance and proof thereof for use of coined words made out of the name of the promoters or their relatives.
    • If the applicant are using or have been using in the last five years , the name applied for incorporation of company or LLP in any other business constitution like Sole proprietor or Partnership or any other incorporated or unincorporated entity , then No Objection Certificate from other partners and associates for use of such name by the proposed Company or LLP, as the case may be, and also a declaration as to whether such other business shall be taken over by the proposed company or LLP or not.
Lead to consumption of additional time and cost in name due-diligence and preparing additional documentation.
Filing of incorporation application

Additional documentation in form of :

  • Affidavit from Promoters and first directors in Form no INC -9 , is required that he is not convicted of any offence in connection with the promotion, formation or management of any company, or that he has not been found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous company law during the preceding five years and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief.
  • Declaration in Form INC-8 by professional i.e. Chartered Accountant, Company Secretary required who is engaged in the formation of the company, and by a person named in the articles as a director, manager or secretary of the company, that all the requirements of this Act and the rules made thereunder in respect of registration and matters precedent or incidental thereto have been complied with.
  • Specimen signatures in form no INC-10 to be notarized or attested by the Bank.
  • Increase in number of documents coupled with requirement of notarization will lead to increase in procedural issue and cost towards incorporation.
  • In case of attestation from Bank,account is required to be opened.
  • Moreover, since subscribers are required to sign the subscription sheet in front of a professional, therefore verification of signatures is an unnecessary requirement.
PAN Card required to be attached for Subscribers Mandatory requirement of PAN is the biggest obstacle. Individual who don’t have any bank account or those who don’t file any income tax return doesn’t have PAN. It generally takes 7-8 working days to get PAN.
Address proof of subscribers to be attached with Form INC 7 Though this is a good move but limited options of document which can be provided as proof, can create some problems.
Filings of details of registered office of the company
  • Utility Bill and NOC for using the premises for the registered office
  • Rent Agreement along with Rent receipts required to be attached with Form INC 22
  • Collecting the required document is a tedious process especially in case of rented office.
  • In case of rent agreement, providing the copy of the rent receipts will be difficult in case no rent or security deposit is given.
Commencement of Business in INC 21 required Additional requirement for private companies

Apart from the aforesaid factors, another factor which is also responsible for delaying the process of company incorporation is, varied and discretionary practices beings followed by the Registrar of Companies for the registering the companies. For 29 states in India, there are around 22 offices of the Registrar of Companies and in absence of any standard operation procedure (SOP), there are high chances of discrepancies. Practically there have been various such instances where totally different processes are being followed in respect of company incorporation by different Registrar’s even to such extent that in some cases, where a company name is disallowed by a particular Registrar is approved by another.

Possible Suggestion:
  • Standardization of practices at the office of the Registrar across country in respect of incorporation needs to establish. Other solution can be in form of establishment of central office for handling of incorporation of companies at one place which will also lead to faster processing of forms.
  • Setting-up of dedicated help-line for dealing with queries relating to setting up business in India.
  • The process of name approval is required to be rationalized. As compared to other developed and developing countries, too much restrictions has been imposed under the name guidelines, which delays the process. Freedom should be given to the entrepreneurs to name their own business subject to necessary restrictions.
  • Linking the registration of various tax registration like PAN, TAN, Excise, Central Sales tax and VAT which are essential for doing business with the incorporation process. So simultaneously with the incorporation of company, other required registration can also be generated or MCA can share data of company incorporated with other departments, so that duplication of information for each process can be avoided and processing time can be improved.
  • Though MCA is providing the facility of opening corporate banks accounts but it needs to create more awareness about the same along with inclusion of all the banks.
  • To reduce the paper work involved, either onus should be on the professionals for verification of authenticity and correctness of all information and documents or instead of taking additional affidavits, declarations etc. on paper, digital signatures of the concerned person should be taken on relevant electronic forms having the aforesaid declaration etc.

Though the existing and Governments in recent past have shown their resolve to work towards easing the process of setting up business in India but still no major step have been taken in this direction. Out of the exhaustive list of reforms which the Government of India is committed to undertake, the reforms related to ease in setting up business should be ranked among the topmost priorities. It will definitely play a pivotal role in enhancing the position of India as a destination to do business and will also add to the economic growth of the country.

Disclaimer: The views expressed in this article are solely the opinion of the author.

AUTHORED BY

Mr. Ankit Singhi

Head of Corporate Affairs & Compliances

ACS, LLB

ankit@indiacp.com

+91 9910888952

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