Introduction - Forming A Company In India

The Companies Act of 1956 sets down rules for the establishment of both public and private
companies. The most commonly used corporate form is the limited company, unlimited
companies being relatively uncommon. A company is formed by registering the Memorandum
and Articles of Association with the State Registrar of Companies of the state in which the main
office is to be located.

Foreign companies engaged in manufacturing and trading activities abroad are permitted by the
Reserve Bank of India to open branch offices in India for the purpose of carrying on the
following activities in India:
# To represent the parent company or other foreign companies in various matters in India, for
example, acting as buying/selling agents in India, etc.

# To conduct research work in which the parent company is engaged provided the results of the
research work are made available to Indian companies

# to undertake export and import trading activities

# to promote possible technical and financial collaboration between Indian companies and
overseas companies.

Application for permission to open a branch, a project office or liaison office is made via the
Reserve Bank of India by submitting form FNC-5 to the Controller, Foreign Investment and
Technology Transfer Section of the Reserve Bank of India. For opening a project or site office,
application may be made on Form FNC-10 to the regional offices of the Reserve Bank of India.
A foreign investor need not have a local partner, whether or not the foreigner wants to hold full
equity of the company. The portion of the equity thus not held by the foreign investor can be
offered to the public.

Incorporating a Company  - Approval of Name

The first step in the formation of a company is the approval of the name by the Registrar of
Companies (ROC) in the State/Union Territory in which the company will maintain its
Registered Office. This approval is provided subject to certain conditions: for instance, there
should not be an existing company by the same name. Further, the last words in the name are
required to be "Private Ltd." in the case of a private company and "Limited" in the case of a
Public Company.  The application should mention at least four suitable names of the proposed
company, in order of preference. In the case of a private limited company, the name of the
company should end with the words "Private Limited" as the last words. In case of a public
limited company, the name of the company should end with the word "Limited" as the last word.
The ROC generally informs the applicant within seven days from the date of submission of the
application, whether or not any of the names applied for is available. Once a name is approved, it
is valid for a period of six months, within which time Memorandum of Association and Articles
of Association together with miscellaneous documents should be filed. If one is unable to do so,
an application may be made for renewal of name by paying additional fees. After obtaining the
name approval, it normally takes approximately two to three weeks to incorporate a company
depending on where the company is registered.

Memorandum and Articles

The Memorandum of Association and Articles of Association are the most important documents
to be submitted to the ROC for the purpose of incorporation of a company. The Memorandum of
Association is a document that sets out the constitution of the company. It contains, amongst
others, the objectives and the scope of activity of the company besides also defining the
relationship of the company with the outside world.

The Articles of Association contain the rules and regulations of the company for the management
of its internal affairs. While the Memorandum specifies the objectives and purposes for which
the Company has been formed, the Articles lay down the rules and regulations for achieving
those objectives and purposes.

The ROC will give the certificate of incorporation after the required documents are presented
along with the requisite registration fee, which is scaled according to the share capital of the
company, as stated in its Memorandum. A private company can commence business on receipt
of its certificate of incorporation.

A public company has the option of inviting the public for subscription to its share capital.
Accordingly, the company has to issue a prospectus, which provides information about the
company to potential investors. The Companies Act specifies the information to be contained in
the prospectus.

The prospectus has to be filed with the ROC before it can be issued to the public. In case the
company decides not to approach the public for the necessary capital and obtains it privately, it
can file a "Statement in Lieu of Prospectus" with the ROC.
On fulfillment of these requirements, the ROC issues a Certificate of Commencement of
Business to the public company. The company can commence business immediately after it
receives this certificate.

Certificate of Incorporation

After the duly stamped Memorandum of Association and Articles of Association, documents and
forms are filed and the filing fees are paid, the ROC scrutinizes the documents and, if necessary,
instructs the authorised person to make necessary corrections. Thereafter, a Certificate of
Incorporation is issued by the ROC, from which date the company comes in to existence. It takes
one to two weeks from the date of filing Memorandum of Association and Articles of
Association to receive a Certificate of Incorporation. Although a private company can commence
business immediately after receiving the certificate of incorporation, a public company cannot do
so until it obtains a Certificate of Commencement of Business from the ROC.

Miscellaneous Documents
The documents/forms stated below are filed along with Memorandum of Association and
Articles of Association on payment of filing fees (depending on the authorised capital of the
company):

# Declaration of compliance, duly stamped

# Notice of the situation of the registered office of the company
# Particulars of Directors, Manager or Secretary
# Authority executed on a non-judicial stamp paper, in favour of one of the subscribers to the
Memorandum of Association or any other person authorizing him to file the documents and
papers for registration and to make necessary corrections, if any
# The ROC’s letter (in original) indicating the availability of the name.

Tax Registration

Businesses liable for income tax must obtain a tax identification card and number [known as
Permanent Account Number (PAN)] from the Revenue Department. In addition to this,
businesses liable to withhold tax must necessarily obtain a Tax Deduction Account Number
(TAN). Both the PAN and the TAN must be indicated on all the returns, documents and
correspondence filed with the Revenue Department. The PAN is also required to be stated in
various other documents such as the documents pertaining to sale or purchase of any immovable
property (exceeding Rs. five lakh), sale or purchase of a motor vehicle, time deposit (exceeding
Rs. 5 lakh), contract for sale or purchase of securities (exceeding Rs. 10 lakh), to name a few.

Rules Applicable

Companies (Central Governments') General Rules and Forms,1956

Filing Registering/Approving Authority

One copy has to be submitted along with a forwarding letter addressed to the concerned
Registrar of Companies.

Enclosures

The declaration must be submitted with the following annexures

# Document evidencing payment of fee
# Memorandum and Articles of Association
# Copy of agreement if any, which the proposed company wishes to enter into with any
individual for appointment as its managing or whole-time director or manager
# Form 18
# Form 32 (except for section 25 company)
# Form 29 (only in case of public companies)
# Power of Attorney from subscribers
# Letter from Registrar of Companies making names available
# No objection letters from directors/promoters
# Requisite fees either in cash or demand draft
 Fees

Fee payable depends on the nominal capital of the company to be registered and may be paid in
one of the following modes. Cash/postal order (upto Rs.501-), demand draft favouring Registrar
of Companies/Treasury Challan should be payable into specified branches of Punjab National
Bank for credit

Time-Limit / Practice Notes

Time-Limit
It should be submitted before incorporation or within 6 months of the name being made
available. Top

Practice Notes
The declaration has to be signed by an advocate of Supreme Court or High Court or an attorney
or pleader entitled to appear before the High Court or a secretary or chartered accountant in
whole-time practice in India who is engaged in the formation of the proposed company or person
named in the articles as director, manager or secretary.

The Registrar of Companies has to be satisfied that not only the requirements of section 33(1)
and (2) have been complied with but be also satisfied that provisions relating to number of
subscribers, lawful nature of objects and name are complied with.

The Registrar will check whether the documents have been duly stamped and also whether the
requirements of other laws are met.

Any defect in any of the documents filed has to be rectified either by all the subscribers or their
attorney, or by any one subscriber holding the power of attorney on behalf of other subscribers.

This form is to be presented to the Registrar of Companies within three months from the date of
letter of Registrar allowing the name.

This declaration is to be given on a non-judicial stamp paper of the requisite value . The stamp
paper should be purchased in the name of the person signing the declaration.

This declaration is to be given by all the companies at, the time of registration, public or private.

The place of Registration No. of the company should be filled up by mentioning New Company
therein.

The Registrar of Companies will now accept computer laser printed documents for purposes of
registration provided the documents are neatly and legibly printed and comply with the other
requirements of the Act. This will be an additional option available to the public to use laser print
besides offset printing for submitting the memorandum and articles for the registration of
companies.
Where the executant of a memorandum of association is illiterate, he shall give his thumb
impression or marks which should be described as such by the subscriber or person writing for
him.

An agent may sign a memorandum on behalf of a subscriber if he is authorised by a power-of-

attorney to do so. In the case of an illiterate subscriber to the memorandum and articles of
association, the thumb impression or mark duly attested by the person writing for him should be
given. The person attesting the thumb mark should make an endorsement on the document to the
effect that it has been read and explained to the subscriber. The Registrar of Companies will not
accept zerox copies of the memorandum and articles of association for the purposes of
registration of companies.

Presented by

This declaration is to be presented by the person signing the declaration or by his bearer at the
counter of the Registrar of Companies office.

Managerial Remuneration

# Any person in order to be appointed as the Managing Director of the company should be a
resident of India. Any person, being a non-resident in India, must obtain an Employment Visa
from the concerned Indian mission abroad at the time of their appointment as the Managing
Director.

# Whereas private companies are free to pay any remuneration to its directors, public companies
can remunerate their directors only within the specified limits.

# In case of public companies, in the event of absence or inadequacy of net profits in any
financial year, managerial remuneration is limited to amounts varying from Rs 75,000 to Rs
2,00,000 per month, depending on the effective capital of the company. In case of an expatriate
managerial person, perquisites in the form of children’s education allowance, holiday passage
money and leave travel concession provided to him would not form part of the said ceiling of
remuneration.

# In case of a managerial position in two companies, remuneration can be drawn from one or
both companies provided that the total remuneration drawn from the companies does not exceed
the higher maximum limit admissible from any one of the companies of which he is a managerial
person.

With whom to be filed

With the Registrar of Companies of the State in which the company is to be registered.

Documents required to be submitted

#  A printed copy each of the Memorandum and Articles of Association of the proposed
company filed along with the declaration duly stamped with the requisite value of adhesive
stamps from the State/ Union Territory Treasury (For value of stamps to be affixed see Schedule
printed in Part III Chapter 23). Below the subscription clause the subscribers to the
Memorandum should write in his own handwriting his full name and father's, or husband's full
name in block letters, full address, occupation, e.g.,'business executive, engineer, housewife, etc.
and number of equity shares taken and then put his or her signatures in the column meant for
signature. Similarly at the end of the Articles Of Association the subscriber should write in his
own handwriting : his full name and father's full name in block letters, full address, occupation.
The signatures of the subscribers to the Memorandum and the Article of Association should be
witnessed by one person preferably by the person representing the subscribers, for registration of
the proposed company before the Registrar of Companies. Under column 'Total number of
equity shares' write the total of the shares taken by the subscribers e.g., 20 (Twenty) only.
Mention date e.g. 5th day of August, 1996. Place-e.g. , 'New Delhi'.

# With the stamped copy, one spare copy each of the Memorandum and Articles of Association
of the proposed company.

# Original copy of the letter of the Registrar of Companies intimating the availability of name.

# Form No. 18 - Situation of registered office of the proposed company.

#  Form No. 29-Consent to act as a director etc. Dates on the consent Form and the undertaking
letters should be the same as is mentioned in the Memorandum of Association signed by the
director himself. A private company and a wholly-owned Government company are not required
to file Form No. 29.

# Form No. 32 (in duplicate). Particulars of proposed, directors, manager or secretary.

#  Power of attorney duly typed on a non-judicial stamp paper of the requisite value. The stamp
paper should be purchased in the name of the persons signing the authority.

# No objection letter from the persons whose name has been given in application for availability
of name in Form No. 1-A as promoters/directors but are not interested at a later stage should be
obtained filed with the Registrar at the time of submitting documents, for registration

# The agreements, if any, which the company proposes to enter with any individual for,
appointment as managing or whole-time director or manager are also to be filed.

Fee payable
Cash or a bank draft/ pay order treasury challan should be drawn in the name of the Registrar of
Companies of the State in which the Company is proposed to be registered as per Schedule X.

Reporting Requirements

Annual Accounts
The Indian company law does not prescribe the books of accounts required to be maintained by a
company. It, however, provides that the same should be kept on accrual basis and according to
the double entry system of accounting and should be such as may be necessary to give a true and
fair state of affairs of the company.

The Indian company law requires every company to maintain proper books of account with
respect to the following:
# All sums of money received and expended and the matters in respect of which the receipt and
expenditure take place
# All sales and purchases of goods by the company
# The assets and liabilities of the company
# In case of companies engaged in manufacturing, processing, mining etc, such particulars
relating to utilization of material or labour or other items of cost.

The first annual accounts of a newly incorporated company should be drawn from the date of its
incorporation upto to the day not preceding the AGM date by more than 9 months. Thereafter,
the accounts should be drawn from date of last account upto the day not preceding the AGM date
by more than 6 months subject to the extension of the time limit in certain cases. The accounts of
the company must relate to a financial year (comprising of 12 months) but must not exceed 15
months. The company can obtain an extension of the accounting period to the extent of 18
months by seeking a prior permission from the ROC.
The annual accounts must be filed with the ROC within 30 days from the date on which the
Annual General Meeting (AGM) of the company was held or where the AGM is not held, then
within 30 days of the last date on which the AGM was required to be held.
Books of accounts to be kept by company

Every company is required to maintain proper books of account with respect to all sums of
money received and expended, all sales and purchases of goods, the assets and liabilities. Central
Government may also specifically require the maintenance of certain additional particulars with
respect to certain classes of Companies. The books of account relating to eight years
immediately preceding the current year together with supporting vouchers are required to be
preserved in good order. Every profit and loss account and balance sheet of the company
(together referred to as financial statements) is required to comply with the accounting standards
issued by the Institute of Chartered Accountants of India. Any deviations from the accounting
standards, including the reasons and consequent financial effect, is required to be disclosed in the
financial statements.

The responsibility for the preparation of financial statements on a going concern basis is that of
the management. The management is also responsible for selection and consistent application of
appropriate accounting policies, including implementation of applicable accounting standards
along with proper explanation relating to any material departures from those accounting
standards. The management is also responsible for making judgements and estimates that are
reasonable and prudent so as to give a true and fair view of the state of affairs of the entity at the
end of the financial year and of the profit or loss of the entity for that period.

Annual Return
Every company having a share capital is required to file an annual return with the ROC within 60
days from the date on which the AGM of the company was held or where the AGM is not held,
then within 60 days of the last date on which the AGM was required to be held.

Certain Accounting related issues

Depreciation
The company law in India permits the use of depreciation rates according to the nature of the
classes of assets. Assets can be depreciated either on the basis of straight-line method (based on
the estimated life of the asset) or on the basis of reducing balance method. The law prescribes the
minimum rates of depreciation. A company may, however, provide for a higher rate of
depreciation, based on a bonafide technological evaluation of the asset. Adequate disclosure in
the annual accounts must be made in this regard.

Dividend
There is no limit on the rate of dividend but there are certain conditions prescribed with regard to
computation of profits that can be distributed as dividend. Generally, no dividend can be paid for
any financial year except out of the profits of that year after making an adequate provision for
depreciation subject to certain conditions.
Dividends may also be distributed out of accumulated profits.

Repatriation of profits
A company has to retain a maximum of 10% of the profits as reserves before the declaration of
dividends. These reserves, inter alia, can be subsequently converted into equity by way of issue
of bonus shares. Dividends are freely repatriable once the investment approval is granted.

Imposition of taxes
Currently, domestic companies are taxable at the rate of 35.875% (inclusive of surcharge of
2.5%) on its taxable income. Foreign companies are taxed at a marginally higher rate of 41%
(including surcharge of 2.5%). However, in case where the income tax liability of the company
under the provisions of the domestic tax laws works out to less than 7.5% of the book profits
(derived after making the necessary adjustments), a Minimum Alternate Tax of 7.6875%
(including a surcharge of 2.5%) on the book profits, would be payable. Domestic companies are
required to pay a dividend distribution tax of 12.8125% (including surcharge of 2.5%) on the
dividends distributed during the year.

Companies are required to withhold tax under the domestic law from certain payments including
salaries paid to employees, interest, professional fee, payments to contractors, commission,
winnings from games / lottery / horse races etc. Moreover, taxes have to be withheld from all
payments made to non-residents at the lower of rates specified under the domestic law or under
the applicable tax treaty, if any.

Penalty

# Imprisonment up to two years and fine

# Person liable for default
# Person signing the declaration.
 Download Company law Forms:
# Form no.1: Declaration of compliance with the requirements of the Companies Act, 1956 on
application for registration of a company

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Company law Forum

# Form no: 18: Notice of the situation / change of situation of registered office

# Form no 29: Consent to act as director of a company and/or undertaking to

take and pay for qualification shares [pursuant to section 264(2)/266(I)(a) &
266(1) (b) (iii)]

# Form no 32: Particulars of appointment of directors and manager and changes among them
[Pursuant to section 303(2)]