Tag: Internal Controls

The commencement of business is a crucial phase for a company. It marks the beginning of the company’s operations, once all legal formalities have been completed. After the registration of the company and obtaining the Certificate of Incorporation, a company can only begin its actual operations after complying with certain conditions.

In India, under the Companies Act, 2013, a company must obtain the Certificate of Commencement of Business for it to begin operations, and this applies to companies that are required to do so, such as public companies (other than One Person Company and Private Company). This stage ensures that the company has completed all necessary formalities, including the necessary funding or capital, and is ready to start its activities.

Documents to Be Filed for Commencement:

To commence business, a company must file the following documents with the Registrar of Companies (RoC):

• Declaration of Compliance:

A declaration signed by the directors that all requirements for the commencement of business have been met. This includes compliance with capital subscription, the filing of the necessary documents, and compliance with the rules prescribed under the Companies Act.

• Proof of Capital Subscription:

Evidence showing that the company has received the required amount of capital from the shareholders. This may include the bank statements showing the deposited amount from shareholders into the company’s bank account.

• Form INC-21:

A company is required to file Form INC-21 to the Registrar of Companies (RoC), requesting the Certificate of Commencement of Business. This form must be filed within 180 days of incorporation.

• Board Resolution:

A resolution passed by the board of directors confirming that the company is ready to commence its business.

• Registered Office Proof:

Proof that the company has a registered office, such as a rental agreement or a utility bill (e.g., electricity or water bill) in the name of the company’s registered office address.

• Certificate of Incorporation:

A copy of the Certificate of Incorporation issued by the RoC, which serves as proof that the company has been officially registered.

• Details of Directors and KMP (Key Managerial Personnel):

Information about the directors, including their identification details, address, and proof of identity.

• Subscribers’ Bank Account Statement:

A statement showing the capital that has been deposited into the company’s bank account.

Once these documents are filed and verified by the Registrar, the company will be issued a Certificate of Commencement of Business, which officially allows the company to begin its commercial operations.

E-Filing of Documents:

With the advent of digitalization and the Government’s push for ease of doing business, many of the processes for company registration and commencement can now be completed online through the Ministry of Corporate Affairs (MCA) portal.

The MCA e-filing system allows for efficient and transparent filing of documents required for the commencement of business.

1. MCA Portal: Companies can submit their documents through the official MCA portal (https://www.mca.gov.in/), which is the central platform for filing all company-related forms in India.
2. Form Filing: Companies can file forms such as INC-21, INC-22, and other necessary documents electronically, along with attaching scanned copies of required documents like the board resolution, proof of capital, registered office proof, and more.
3. Digital Signature: All documents must be signed digitally by the company’s directors or authorized representatives, ensuring security and authenticity.
4. Payment of Fees: The required filing fee can be paid online using various payment methods, including debit cards, credit cards, or online banking.
5. Verification and Acknowledgment: After submission, the MCA portal generates an acknowledgment and the documents will be verified by the Registrar. Once verified, the Certificate of Commencement of Business will be issued electronically.
6. Easy Access: The e-filing system allows company directors to track the status of their filings and receive updates or notifications regarding the approval or rejection of their documents.

The introduction of e-filing has simplified the procedure, saving time, and making it more convenient for businesses to comply with the statutory requirements. Furthermore, it has enhanced transparency and reduced the chances of human error.

Reverse Book-Building is a process used primarily for determining the price of a security during buyback offers or tender offers, rather than through a traditional method where the issuer or seller sets the price. In reverse book-building, the price is decided by the shareholders or investors who express their willingness to sell their securities, and the issuer or buyer then determines the final price based on the demand.

This method is commonly used in buyback offers, where a company repurchases its own shares from the existing shareholders, or in delisting offers, where a company may wish to remove its shares from a stock exchange.

Reverse book-building allows the company to gauge the price at which shareholders are willing to sell their securities, offering more flexibility compared to the fixed price model.

Process of Reverse Book-Building:

• Announcement of Offer:

The company first announces its intention to buy back its shares or securities through a reverse book-building process. This announcement contains the maximum price the company is willing to pay, the number of shares it intends to buy back, and the time frame during which shareholders can submit their offers.

• Submission of Bids:

Shareholders wishing to sell their shares during the buyback or tender offer will submit their bids. In this bid, shareholders state the number of shares they are willing to sell and the price at which they are willing to sell those shares. It is essential to note that shareholders can submit their bids within a price range specified by the company.

• Collection of Bids:

The company collects all the bids submitted by shareholders. These bids can vary based on the price the shareholders are willing to accept. The bids can be submitted either online or through other means prescribed by the company.

• Price Determination:

Once the bidding period concludes, the company reviews all the bids received. The company will then determine the final buyback price by considering the lowest price at which it can buy back the required number of shares. This process is termed price discovery. The company can accept all bids at the final determined price or reject bids above the final price.

• Acceptance of Shares:

Once the price is determined, the company accepts the shares at the decided price. In some cases, if the demand exceeds the maximum number of shares the company wants to repurchase, a pro-rata allocation system may be used. The accepted shares are then bought back from shareholders at the final price determined by the reverse book-building process.

• Payment and Settlement:

Once the shares are accepted, the company proceeds to settle the payments with shareholders. The amount corresponding to the shares accepted is credited to the shareholders’ bank accounts, and the shares are canceled or removed from circulation.

Advantages of Reverse Book-Building:

• Market-Driven Pricing:

Reverse book-building allows the price to be determined based on market demand, ensuring that shareholders get a fair price for their shares. This flexibility benefits both shareholders and the company as the price reflects the price at which shareholders are willing to part with their securities.

• Transparency:

The reverse book-building process is transparent as shareholders are aware of the pricing range and can submit their bids within that range. It also prevents manipulation of the share price, as it reflects actual market sentiment.

• Flexibility in Pricing:

The reverse book-building method provides companies with the flexibility to buy back shares at market-determined prices, allowing for a more accurate and fair price discovery process compared to traditional fixed-price buybacks.

• Investor Confidence:

Shareholders may feel more confident in participating in the buyback process as the price is determined by their own bids. This may encourage higher participation in the buyback offers.

• Optimal Capital Management:

Companies use reverse book-building as an efficient method to manage their capital structure. By buying back shares at market-driven prices, the company can optimize its equity base and improve earnings per share (EPS).

Disadvantages of Reverse Book-Building:

• Market Fluctuations:

Since the price is determined based on the bids submitted by shareholders, it may be influenced by short-term market fluctuations. If there is a significant drop in the market, the final buyback price could be lower than what shareholders expected.

• Low Participation Risk:

If shareholders are not willing to offer their shares at a price close to the company’s maximum buyback price, the company may fail to achieve its buyback target. This could lead to inefficiency in terms of the company’s capital management plans.

• Complex Process:

The reverse book-building process can be more complex and time-consuming than a traditional fixed-price offer. This complexity arises from the need to collect, analyze, and evaluate a large number of bids from different shareholders.

• Increased Administrative Costs:

Companies may incur higher administrative and processing costs when conducting a reverse book-building process. These costs arise from the need to handle the submission of bids, evaluate the bids, and process the payments.

• Potential for Mispricing:

While reverse book-building aims to reflect market sentiment, it is possible for a company to misjudge the demand or for certain investors to submit high or low bids that do not reflect the true market value of the shares.

Applications of Reverse Book-Building

Reverse book-building is commonly used in two key scenarios:

• Buyback Offers:

Companies use reverse book-building to buy back their own shares from the market, which helps reduce the number of shares in circulation. This is often done to improve earnings per share (EPS), return capital to shareholders, or increase ownership concentration.

• Delisting Offers:

Reverse book-building is also used by companies wishing to delist from the stock exchange. Shareholders are invited to tender their shares at market-based prices, and the company then decides on the price at which it will buy back the shares to facilitate delisting.

ASBA (Application Supported by Blocked Amount) is a process that allows investors to apply for shares in an Initial Public Offering (IPO), Follow-on Public Offering (FPO), Rights Issue, or any other securities offering, where the application amount is blocked in the investor’s bank account, rather than being debited. This ensures that the funds are not immediately transferred and are only blocked until the final allotment of shares is made. The ASBA system was introduced by the Securities and Exchange Board of India (SEBI) to streamline the IPO application process and protect investor interests.

The ASBA facility is provided by banks that are authorized by SEBI to process such applications. It helps investors to apply for public offerings in a more secure, efficient, and hassle-free manner. Under this mechanism, the investor’s application amount is not deducted from their account but is merely blocked by the bank. This enables the investor to earn interest on their funds until the shares are allotted.

How ASBA Works?

• Investor Registration:

To apply for IPOs using ASBA, the investor must have a Demat account and a bank account that supports the ASBA facility. The investor also needs to be registered with the bank for the ASBA service.

• Filling the Application:

The investor fills in the IPO application form available with the designated bank. The form can be filled online or physically at the bank’s branch.

• Blocking the Amount:

The bank blocks the required funds in the investor’s account for the application amount, which is an amount equal to the total value of the shares applied for, at the issue price.

• Submission of Application:

Once the application is completed, the investor submits the form to the bank, either physically or through an online platform. The bank will then validate the application and block the necessary funds.

• IPO Allotment Process:

If the IPO is oversubscribed, the shares are allotted on a pro-rata basis or as per the allocation method. If the investor is allotted the shares, the blocked amount is debited from their bank account. If the investor is not allotted any shares or is allotted fewer shares than applied for, the unblocked amount is released by the bank.

• Release of Blocked Funds:

If the investor does not receive the allotment or if the issue does not go through, the bank releases the blocked amount after the finalization of the allotment process.

Features of ASBA

• Investor Control Over Funds:

In the ASBA process, the investor’s money remains in the bank account until the final allotment of shares. This ensures that the funds are not transferred unless the investor is allotted the shares, providing better control over their funds.

• Interest on Blocked Amount:

Since the funds are blocked, the investor can still earn interest on the blocked amount, which is not possible in traditional methods where money is debited immediately.

• Security and Transparency:

ASBA system enhances security as the investor does not have to worry about fraud or misuse of funds. The process is transparent, with the application money being blocked in the account and only released after the allotment process is completed.

• No Risk of Overdraft:

ASBA ensures that the funds are only blocked and not debited unless the shares are allotted, thus preventing the possibility of overdrawing the account or spending money that is earmarked for the IPO.

• No Requirement for Physical Application Forms:

ASBA allows investors to apply for IPOs online or through their banks’ digital platforms, reducing the need for physical forms and paperwork.

Advantages of ASBA

• No Immediate Deduction of Funds:

The main advantage of ASBA is that the investor’s funds are blocked, but not debited, until the shares are allotted. If shares are not allotted, the amount is immediately unblocked.

• Reduction in Fraud and Errors:

As the ASBA process is fully electronic, it eliminates the risk of errors and fraud that may occur in the traditional application process. There is no risk of the application fee being misappropriated.

• Reduced Workload for Issuers and Bankers:

ASBA process reduces paperwork and the physical movement of forms, which cuts down the operational workload for both the issuer and the bank, improving efficiency.

• Eligibility for Interest:

The blocked amount in the investor’s account can continue to earn interest, making it more advantageous than the earlier process where the money was deducted from the account without earning any return.

• Faster Refunds:

Since the money is blocked instead of being debited, in case of non-allotment of shares, refunds are processed faster and more efficiently.

• Applicable for All Categories:

ASBA is applicable for retail investors, qualified institutional buyers (QIBs), and non-institutional investors.

Disadvantages of ASBA:

• Limited to SEBI-Approved Banks:

ASBA system is available only through certain SEBI-authorized banks. Investors may not be able to use this facility if their bank does not support it.

• Manual Errors:

In the case of physical ASBA applications, there may be the possibility of human errors such as incorrect filling of the application form or mistakes while blocking the amount.

• Requires Demat Account:

The investor needs to have a Demat account to participate in the ASBA process, which might be a disadvantage for those who do not have one.

• Limited Availability of ASBA for Some Offers:

While ASBA is widely used for IPOs, it may not be available for every public offering or other securities offerings, such as private placements or specific mutual fund schemes.

The doctrine operates under the assumption that company documents are publicly available and accessible for inspection at the Registrar of Companies (RoC). Once a company is registered, these documents, especially the Memorandum and Articles of Association, are available for inspection by the public, ensuring that anyone entering into a contract or business relationship with the company is presumed to have knowledge of its rules, powers, and objects.

The doctrine of constructive notice means that third parties (individuals or other companies) are legally presumed to know the contents of a company’s constitutional documents once the company is registered, even if they have not actually seen these documents. Hence, they are constructively aware of the powers and restrictions imposed on the company, and they cannot later claim ignorance regarding the company’s internal rules or objectives.

Features of the Doctrine of Constructive Notice:

• Public Documents:

The company’s documents, particularly the Memorandum and Articles of Association, are treated as public documents. This means anyone wishing to engage in business with the company is expected to review these documents before finalizing any transaction.

• Presumption of Knowledge:

The doctrine presumes that any third party interacting with the company is deemed to have knowledge of the contents of the company’s public documents, whether they have read them or not.

• Protection for the Company:

The doctrine is designed to protect the company from any claims of ignorance from third parties. By knowing or being presumed to know the company’s rules, third parties cannot claim that they were unaware of any limitations on the company’s powers.

• Limited to Public Documents:

The doctrine does not apply to documents that are not publicly available, such as internal communications, unfiled agreements, or documents not required to be disclosed under company law.

• Third Parties’ Responsibility:

Third parties are expected to make reasonable inquiries about the company’s legal documents before engaging in any contract or transaction. If they do not, they bear the risk of not being able to claim ignorance later.

Application of the Doctrine of Constructive Notice

The doctrine applies mainly to the Memorandum of Association and Articles of Association, which define the company’s objectives, powers, and internal regulations.

• Memorandum of Association:

The Memorandum of Association is the company’s charter document, specifying the company’s name, registered office, objectives, powers, and capital structure. Third parties entering into a transaction with the company are presumed to know the scope of the company’s powers as defined in this document. If the company enters into an agreement beyond its stated objects, the third party may not be able to enforce that agreement under the doctrine of constructive notice.

• Articles of Association:

The Articles of Association outline the company’s internal rules and procedures, such as the process of electing directors, the powers of shareholders, and procedures for meetings. Third parties are presumed to know the company’s internal governance procedures as outlined in the Articles. If a contract is entered into that contravenes these procedures, it may be voidable by the company.

Doctrine of Constructive Notice and the Company’s Powers

Under this doctrine, the third party is presumed to know not only the company’s objects and powers but also its limitations. This means if the company attempts to enter into an agreement beyond its stated powers (i.e., ultra vires), the third party cannot claim that they were unaware of the restriction, as they are deemed to have knowledge of the company’s objects.

For example, if a company’s Memorandum of Association restricts its activities to manufacturing, and it enters into an agreement for providing consultancy services, the third party is deemed to know that the company does not have the authority to engage in that type of business. As a result, the company could potentially avoid the contract on the grounds that it exceeds its powers.

Exceptions to the Doctrine of Constructive Notice

While the doctrine of constructive notice is a powerful tool, there are several exceptions where it may not apply:

• Independence from Unauthorized Transactions:

If a company’s directors or officers act outside their authority but do so in good faith, third parties may not be bound by the doctrine. For instance, in the case of a contract that is ultra vires (beyond the company’s scope), the third party may still not be held accountable if they acted in good faith and had no reason to doubt the validity of the transaction.

• Doctrine of Indoor Management (Turquand’s Rule):

This exception allows third parties dealing with the company to assume that the internal procedures (as laid out in the Articles of Association) are properly followed. As a result, they are not required to inquire into whether the company’s internal management procedures were adhered to in the specific transaction.

• Fraud or Misrepresentation:

If a company engages in fraud or misrepresentation, the third party may not be bound by the doctrine of constructive notice. In such cases, the third party can claim that they were unaware of the fraudulent activities.

The process of forming a company involves multiple stages—registration, capital subscription, and commencement of business—each of which has distinct legal and operational implications.

1. Effects of Registration

Registration refers to the formal process by which a company is recognized as a legal entity under the Companies Act, 2013 (India). The company becomes a separate legal entity distinct from its members, with its own rights, obligations, and responsibilities.

Effects of Registration:

• Legal Entity:

Upon registration, the company gains the status of a separate legal entity. This means that the company can own property, sue or be sued, and enter into contracts in its own name, independent of its members or shareholders.

• Limited Liability:

Shareholders or members of the company enjoy limited liability. In case of company debts, their personal assets are not at risk, and they are only liable for the unpaid amount on their shares.

• Perpetual Succession:

The company enjoys perpetual succession, meaning it continues to exist even if the members or shareholders change, or in case of death, bankruptcy, or insolvency of members.

• Rights and Privileges:

The company has the ability to issue shares, borrow funds, enter into agreements, and other business activities, which are vital for conducting operations.

• Compliance with Law:

The company becomes bound by the provisions of the Companies Act and other applicable laws. It is required to maintain records, hold annual meetings, and file returns with the Registrar of Companies (RoC).

2. Capital Subscription

Capital subscription refers to the process by which the company raises funds from its shareholders or the public to finance its operations. This can be done through the sale of shares or debentures, depending on the type of company.

Effects of Capital Subscription:

• Capital Formation:

The company is able to raise the capital needed for its operations, expansion, and business activities. The money collected through capital subscription is used to purchase assets, pay for operational expenses, and generate business income.

• Ownership and Control:

Shareholders who subscribe to the company’s capital acquire ownership interests in the company. The number of shares held determines their influence on the company’s decision-making processes, such as voting at annual general meetings (AGMs).

• Liability of Shareholders:

Once the capital is subscribed, shareholders are liable to pay the amount for which they have subscribed. However, their liability is limited to the unpaid portion of their shares. In the case of a public limited company, the shares are often freely transferable.

• Share Capital and Legal Compliance:

The subscription of capital forms the share capital of the company, and the company is required to comply with regulations regarding the issuance, allotment, and distribution of shares. It must also ensure the appropriate accounting and financial disclosures.

3. Commencement of Business

The commencement of business is a crucial step that marks the actual start of a company’s operations. This process usually happens after the company has completed the registration and capital subscription stages.

Effects of Commencement of Business:

• Legal Capacity to Operate:

Upon commencement, the company gains the full legal ability to engage in business activities. It can now start operations such as entering contracts, providing services, or selling goods.

• Trading and Revenue Generation:

The company can now engage in commercial transactions such as purchasing and selling goods, hiring employees, and offering products or services. It can also generate revenue, which will be used to cover expenses, pay taxes, and provide profits to shareholders.

• Tax Obligations:

Once business commences, the company becomes subject to various tax liabilities. It must comply with tax laws, including registering for GST, income tax, and corporate tax. It is also required to maintain proper financial records, submit annual returns, and undergo audits.

• Operational Activities:

Commencement of business allows the company to engage in day-to-day operations. This includes manufacturing, marketing, research, and development, and other activities that are vital to the company’s business.

• Legal and Financial Responsibilities:

From this point onwards, the company is responsible for managing its legal and financial matters, such as fulfilling contracts, paying its debts, ensuring compliance with regulatory authorities, and protecting its assets.

Registered Company is a business entity formed and registered under the provisions of the Companies Act, 2013 or its preceding laws in India. It acquires a distinct legal identity upon registration, separate from its owners or members, enabling it to own property, sue, or be sued in its own name. Registered companies can be classified into private, public, and one-person companies, each governed by specific rules. The registration process involves filing the necessary documents, such as the Memorandum of Association (MOA) and Articles of Association (AOA), with the Registrar of Companies (ROC), ensuring compliance with statutory requirements.

Features of Registered Company:

• Separate Legal Entity

A registered company is a separate legal entity from its owners (shareholders) and directors. This means the company can own property, enter into contracts, and incur liabilities in its own name. Shareholders’ liability is limited to their share capital.

• Limited Liability

One of the fundamental features of a registered company is limited liability. In case of debts or legal actions, the shareholders’ liability is limited to the unpaid value of their shares. This protects personal assets of the shareholders, unlike in a partnership where personal assets can be at risk.

• Perpetual Succession

A registered company enjoys perpetual succession, meaning its existence is not affected by the death, insolvency, or transfer of shares by its members. The company continues to exist even if the shareholders change over time, ensuring business continuity.

• Transferability of Shares

In a registered company, the ownership or shareholding is easily transferable. Shares can be bought, sold, or transferred, subject to the rules in the company’s Articles of Association. This feature is particularly common in public companies, where shares are traded on stock exchanges.

• Governance by the Companies Act

A registered company is governed by the Companies Act, 2013 and must adhere to its provisions. It is required to maintain statutory books, conduct annual general meetings (AGMs), and comply with regulatory reporting requirements, including financial statements and audits.

• Ownership Structure

A registered company can have various ownership structures, such as a private company with limited members or a public company with the ability to issue shares to the public. The company’s ownership is defined by the shareholding structure outlined in its Memorandum of Association (MOA).

Formation of Registered Company:

1. Choosing the Type of Company

The first step in forming a registered company is to decide on the type of company to be formed. Common types of companies in India include:

• Private Limited Company: Limited liability, small in number, restricted share transfer.
• Public Limited Company: Large in size, ability to raise funds by issuing shares to the public.
• One Person Company (OPC): A company with only one member.

2. Name Approval

The next step is to select a suitable name for the company. The name must be unique and comply with the naming guidelines under the Companies Act. The proposed name is submitted to the Registrar of Companies (RoC) for approval. The name should reflect the business activity and should not resemble any existing company name. This is done through filing Form INC-1 with the RoC.

3. Drafting the Memorandum and Articles of Association

Once the name is approved, the company must prepare two essential documents:

• Memorandum of Association (MoA): A legal document that defines the scope and objectives of the company, including the company’s powers, objectives, and liabilities.
• Articles of Association (AoA): This document governs the internal management and operation of the company, specifying rules for the company’s governance, including the rights and duties of directors, shareholders, and other members.

Both MoA and AoA must be signed by the first subscribers of the company.

4. Filing with the Registrar of Companies

The next step is to file the required documents with the Registrar of Companies (RoC). These documents include:

• Application for incorporation (Form INC-7 for companies, or Form INC-2 for OPCs)
• MoA and AoA
• Declaration by the company’s director (Form INC-9)
• Proof of office address where the company will operate.
• Identity and address proof of the directors and shareholders.
• Digital Signature Certificate (DSC): Required for the director(s) to sign the documents electronically.

5. Obtaining the Certificate of Incorporation

Once the documents are submitted, the RoC verifies the application. If everything is in order, the RoC issues the Certificate of Incorporation. This certificate is a legal proof that the company has been formally registered and recognized as a separate legal entity. It includes the company’s Corporate Identification Number (CIN), which is used for all official correspondence.

6. Applying for PAN and TAN

• PAN (Permanent Account Number): The company must apply for a PAN, which is necessary for tax purposes.
• TAN (Tax Deduction and Collection Account Number): Required if the company will be deducting taxes at source (TDS) for payments to employees, contractors, etc.

7. Opening a Bank Account

After obtaining the Certificate of Incorporation, the company can open a bank account in its name using the CIN, MoA, and AoA. This account will be used to manage the company’s financial transactions.

8. Compliance with Other Statutory Requirements

After registration, the company must comply with additional statutory requirements, such as:

• Registering under the Goods and Services Tax (GST), if applicable.
• Obtaining licenses and permits specific to the business (such as import-export, health licenses, etc.).
• Hiring an auditor for auditing the company’s financial statements.

Advantages of Registered Company:

• Separate Legal Entity

A registered company is a separate legal entity distinct from its owners and directors. This means the company has its own legal status and can own property, enter contracts, and sue or be sued in its name. The personal assets of shareholders and directors are protected from the company’s liabilities, offering greater security.

• Limited Liability

One of the primary benefits of a registered company is limited liability. Shareholders are liable only up to the value of their unpaid shares, protecting their personal assets in the event of the company’s financial difficulties. This is in stark contrast to unregistered business structures like sole proprietorships and partnerships, where personal assets can be at risk.

• Perpetual Succession

A registered company has perpetual succession, meaning its existence is not affected by changes in ownership, death, or insolvency of its shareholders or directors. The company continues to exist even if the ownership changes, ensuring business continuity. This stability is crucial for long-term growth and investment opportunities.

• Easy Transfer of Ownership

Shares in a registered company can be easily transferred from one person to another, especially in a public company. This transferability of ownership allows shareholders to buy and sell shares, offering liquidity and flexibility. It also facilitates the entry and exit of investors.

• Ability to Raise Capital

Registered companies, particularly public ones, have easier access to capital markets. They can raise funds by issuing shares or bonds to investors. This ability to raise capital enables businesses to finance their growth, innovation, and expansion projects more effectively than unregistered businesses.

• Credibility and Trust

Being a registered company adds credibility to a business. It signals to customers, suppliers, and investors that the company is legitimate and adheres to the legal and regulatory requirements. This can lead to enhanced trust, better business relationships, and easier access to credit.

• Tax Benefits and Incentives

Registered companies enjoy various tax benefits and incentives under the law, such as exemptions, deductions, and special tax rates. These tax advantages can reduce the overall tax burden and improve profitability, which is particularly beneficial for large businesses.

• Access to Government Contracts

A registered company is eligible to bid for government contracts and other large-scale projects. Many government contracts require businesses to be formally registered as companies, which can open doors to lucrative and stable opportunities.

Challenges of Registered Company:

• Compliance with Legal and Regulatory Requirements

A registered company is subject to strict legal and regulatory requirements under the Companies Act, 2013 and other applicable laws. This includes maintaining statutory records, filing annual returns, holding regular board meetings, and ensuring compliance with tax laws. Non-compliance can lead to penalties or even the company being struck off from the registry. Keeping up with these legal obligations requires time, effort, and sometimes expert legal advice.

• High Formation and Operational Costs

The process of registering a company can be expensive due to government fees, legal charges, and other documentation costs. Additionally, maintaining a company incurs ongoing expenses, such as accounting, auditing, and legal fees. For small businesses, these costs can be burdensome, especially when profits are low in the initial years of operation.

• Complex Management Structure

Registered companies, especially public ones, often have a complex management structure involving shareholders, directors, and various officers. This can lead to challenges in decision-making, coordination, and management of operations. Conflicts may arise between stakeholders, and ensuring effective governance requires strong leadership and clear organizational structures.

• Limited Control for Shareholders

In public companies, shareholders typically own the company but may have limited control over its day-to-day operations, which are managed by the board of directors. This separation between ownership and management can create conflicts of interest, where the objectives of the management may not always align with those of the shareholders.

• Liability Risks for Directors

While shareholders enjoy limited liability, the directors of a registered company may face personal liability for breaches of fiduciary duties or violations of company laws. Directors can be held accountable for acts such as mismanagement, fraud, or failure to comply with regulatory obligations, which could result in legal consequences or damage to their professional reputation.

• Difficulty in Raising Capital

Although a registered company can raise capital by issuing shares (especially public companies), it may still face challenges in securing financing, especially during the initial stages. Financial institutions and investors require a solid business plan, proven track record, or collateral, which may be difficult for newly formed or small companies to provide. Additionally, public companies face the challenge of market volatility affecting stock prices.

Statutory Company in India is a corporate entity established by a specific Act of Parliament or a state legislature. These companies are created to serve public purposes, often involving essential services like utilities, finance, or infrastructure development. Their structure, powers, functions, and governance are defined explicitly in the enabling legislation. Statutory companies are not governed by the general provisions of the Companies Act, 2013, but by the Act that created them. Examples include the Reserve Bank of India (RBI), Life Insurance Corporation of India (LIC), and Indian Railways. These companies typically operate with government oversight while retaining functional autonomy.

Features of Statutory Company:

Statutory Companies in India are unique entities established by an act of Parliament or a state legislature to fulfill specific public objectives. They operate under a distinct legal framework, which differentiates them from other types of companies.

• Creation by Legislation

A statutory company is established through a specific legislative act. This act defines its objectives, powers, functions, and governance structure. For example, the Reserve Bank of India (RBI) was created under the RBI Act, 1934, and the Life Insurance Corporation (LIC) under the LIC Act, 1956. The act itself serves as the company’s constitution, providing a robust legal foundation.

• Public Service Objective

The primary purpose of a statutory company is to serve the public interest. These companies often operate in critical sectors such as finance, transportation, energy, and insurance, aiming to promote economic development, provide essential services, or regulate key industries. Their focus on public welfare distinguishes them from profit-driven private companies.

• Government Ownership and Control

Statutory companies are usually fully owned or significantly controlled by the government. The level of control depends on the nature of the company and its objectives. Government-appointed officials typically manage these companies, ensuring alignment with national or state policies.

• Legal Personality

A statutory company is a separate legal entity, meaning it can own property, enter into contracts, sue, or be sued in its own name. Despite being government-controlled, it enjoys operational autonomy to fulfill its objectives efficiently.

• Accountability and Transparency

Statutory companies are subject to strict public accountability. They must adhere to the provisions of their enabling act and often report to the government or Parliament. Regular audits and compliance with legal norms ensure transparency in their operations, maintaining public trust.

• Monopoly or Special Privileges

Many statutory companies are granted monopolistic rights or special privileges to carry out their functions without competition. For example, Indian Railways has exclusive control over rail transport. These rights enable them to focus on service quality and public welfare rather than market competition.

Formation of Statutory Company:

The formation of a statutory company in India is distinct from regular companies as it is established through an act of Parliament or a state legislature. These companies are created to perform specific public services or functions that require government oversight and legal authority.

1. Identification of Purpose and Feasibility Study

The initial step in forming a statutory company involves identifying the public need or specific purpose that the entity will address. A feasibility study is conducted to evaluate the viability of the proposed company, focusing on its objectives, economic impact, and operational structure. This ensures that the company aligns with national or state goals and priorities.

2. Drafting of the Bill

Based on the feasibility study, a draft bill is prepared detailing the purpose, powers, structure, functions, and governance of the proposed statutory company. The bill includes provisions such as capital requirements, management structure, roles and responsibilities of the directors, and reporting mechanisms.

3. Parliamentary or Legislative Approval

The draft bill is introduced in Parliament (for central government companies) or the state legislature (for state-level companies). It undergoes a rigorous legislative process, including debates, discussions, and amendments, to ensure that the company’s formation aligns with public interest. Once approved by both houses of Parliament or the state legislature, the bill is sent to the President or Governor for assent.

4. Enactment of the Law

After receiving assent, the bill becomes an Act, officially creating the statutory company. The Act defines the legal framework, objectives, and operational guidelines for the company. For example, the Reserve Bank of India Act, 1934 and the Life Insurance Corporation Act, 1956 established the RBI and LIC, respectively.

5. Operationalization of the Company

Following the enactment, the government appoints key personnel, allocates initial funding, and ensures that necessary infrastructure is in place. The company begins operations as per the guidelines outlined in the Act, adhering to its defined objectives and public accountability standards.

Advantages of Statutory Company:

• Specialized Purpose and Focus

Statutory companies are established by specific legislative acts to fulfill specialized roles or public service objectives. This focused mandate allows them to concentrate their resources and efforts on critical sectors like finance, infrastructure, health, or utilities. For instance, entities like the Reserve Bank of India and Indian Railways operate with clear and specialized objectives, ensuring better resource allocation and impactful delivery.

• Legal Authority and Stability

A statutory company derives its authority directly from legislation, giving it a strong legal foundation. This ensures stability and legitimacy in its operations. The explicit mention of its objectives, functions, and powers in the enabling act minimizes ambiguities and provides a clear operational framework. The legal backing also protects the organization against arbitrary dissolution or interference.

• Public Accountability and Transparency

Statutory companies are subject to government oversight and public accountability, ensuring transparency in their operations. Regular audits, compliance with legal norms, and parliamentary scrutiny help maintain trust and integrity. This level of accountability ensures that resources are utilized effectively and aligns with the public interest.

• Government Support and Funding

As government-established entities, statutory companies often receive financial backing, making them less vulnerable to market risks or economic fluctuations. This support enables them to undertake large-scale or long-term projects that may not be feasible for private entities, especially in sectors requiring heavy capital investment, such as transportation and energy.

• Monopoly or Exclusive Rights

Statutory companies are often granted monopolistic rights in their respective fields to ensure public service delivery without market competition. For instance, Indian Railways holds exclusive control over the country’s rail transport system. This exclusivity allows the company to focus on service quality and accessibility rather than competing for profits.

• Social and Economic Impact

Statutory companies play a critical role in promoting socio-economic development. They ensure equitable access to essential services, create employment opportunities, and contribute to national infrastructure development. For instance, companies like LIC and State Bank of India support financial inclusion, while Indian Railways connects remote regions, promoting trade and mobility.

Challenges of Statutory Company:

• Bureaucratic Inefficiency

Statutory companies often face bureaucratic hurdles due to their government-linked structure. Decision-making processes can be slow and cumbersome, as approvals often require navigating multiple levels of authority. This inefficiency can hinder the company’s ability to respond quickly to market changes and innovate, ultimately affecting productivity and service delivery.

• Political Interference

Statutory companies are susceptible to political influence, as their leadership and major policy decisions are often tied to government priorities. Political agendas may not always align with the company’s objectives or market demands, leading to inefficiencies or mismanagement. This interference can impact the autonomy and long-term strategy of the organization.

• Limited Financial Flexibility

Since statutory companies rely heavily on government funding or are subject to stringent financial regulations, they often face constraints in raising capital. This dependency can limit their ability to invest in new projects, adopt advanced technologies, or expand operations. Moreover, revenue generation is sometimes secondary to fulfilling public service obligations, further straining financial resources.

• Resistance to Change

Being rooted in legislation, statutory companies can be resistant to change due to rigid operational frameworks and adherence to predefined rules. Implementing reforms or modern practices often requires amending the founding legislation, which is a time-consuming process. This rigidity makes it challenging for such companies to adapt to evolving industry trends or customer needs.

• Public Accountability Pressure

As statutory companies are publicly funded and operate under government oversight, they are under constant scrutiny from various stakeholders, including the public, media, and political entities. This high level of accountability can lead to conservative approaches in decision-making, where risk-taking is minimized, potentially stifling growth and innovation.

• Corruption and Mismanagement Risks

Statutory companies may face issues of corruption, nepotism, or inefficiency, especially when governance mechanisms are weak. The lack of competition and market pressures can result in complacency and mismanagement. These issues can erode public trust and diminish the effectiveness of the organization in fulfilling its objectives.

Provisions of the Act

Article 3 of the act describes the definition of a company, the types of companies that can be formed e.g. public, private, holding, subsidiary, limited by shares, unlimited etc. Further on in Article 10 E it explains about the constitution of board of company, it explains the companies’ name, the jurisdictions, tribunals, memorandums and the changes that can be made. Article 26 and further on explains about the article of association of the company which a very important part when forming a company and various amendments that can be made. Article 53 to 123,it explains about the shares, the shareholders their rights, it explains about debentures, share capital, their procedure and powers within the company. Article 146 to 251 it explains about the management and administration of the company and the provisions registered office and name. Article 252 to 323 elaborates on the provisions of duties, powers responsibility and liability of the directors in the company which is a very integral part of the company when it is formed. Article 391 to 409 explains about the arbitration, the prevention and obsession of the company Article 425 to 560 it explains the procedure of winding up of a company, the preventions the rights of shareholders, creditors, methods of liquidations, compensation provided and ways of winding up the company. Article 591 and further on explains about setting up companies outside India and their fees and registration procedure and all.

An overview of Companies Act 1956

Companies Act 1956 explains about the whole procedure of the how to form a company, its fees procedure, name, constitution, its members, and the motive behind the company, its share capital, about its general board meetings, management and administration of the company including an important part which is the directors as they are the decision makers and they take all the important decisions for the company their main responsibility and liabilities about the company matter the most. The Act explains about the winding of the business as well and what happens in detail during liquidation period.

Company objective and legal procedure based on the Act

The basic objectives underlying the law are:

• A minimum standard of good behaviour and business honesty in company promotion and management.
• Due recognition of the legitimate interest of shareholders and creditors and of the duty of managements not to prejudice to jeopardize those interests.
• Provision for greater and effective control over and voice in the management for shareholders.
• A fair and true disclosure of the affairs of companies in their annual published balance sheet and profit and loss accounts.
• Proper standard of accounting and auditing.
• Recognition of the rights of shareholders to receive reasonable information and facilities for exercising an intelligent judgment with reference to the management.
• A ceiling on the share of profits payable to managements as remuneration for services rendered.
• A check on their transactions where there was a possibility of conflict of duty and interest.
• A provision for investigation into the affairs of any company managed in a manner oppressive to minority of the shareholders or prejudicial to the interest of the company as a whole.
• Enforcement of the performance of their duties by those engaged in the management of public companies or of private companies which are subsidiaries of public companies by providing sanctions in the case of breach and subjecting the latter also to the more restrictive provisions of law applicable to public companies.

Companies Act empowerment and mechanism

In India, the Companies Act, 1956, is the most important piece of legislation that empowers the Central Government to regulate the formation, financing, functioning and winding up of companies. The Act contains the mechanism regarding organizational, financial, and managerial, all the relevant aspects of a company. It empowers the Central Government to inspect the books of accounts of a company, to direct special audit, to order investigation into the affairs of a company and to launch prosecution for violation of the Act. These inspections are designed to find out whether the companies conduct their affairs in accordance with the provisions of the Act, whether any unfair practices prejudicial to the public interest are being resorted to by any company or a group of companies and to examine whether there is any mismanagement which may adversely affect any interest of the shareholders, creditors, employees and others. If an inspection discloses a prima facie case of fraud or cheating, action is initiated under provisions of the Companies Act or the same is referred to the Central Bureau of Investigation. The Companies Act, 1956 has been amended from time to time in response to the changing business environment.

According to the Startup India Portal, India has about 50,000 start-ups and is the 3rd largest ecosystem in the world. Start-ups are now emerging in tier-II and tier-III cities, such as Pune, Ahmedabad, and Kochi. Further, there is an increase in the investment flows from Chinese, Japanese, and Singapore based investors.

Causes for success

Reasons responsible for the growth of start-ups are:

• Large Indian Market:

India’s diversity in culture, religion, and language has helped start-ups to create diversified products, according to the needs of a particular community. This becomes their Unique Selling Proposition, which in-turn entices investors to fund the start-up.

• Fast-moving business environment:

In an uncertain and changing business ecosystem, the companies are under constant pressure to innovate to find a footing in the market. Sometimes, other companies invest or buy the start-ups to increase their own uniqueness.

• Easy access to funds

The government has set up funds for easy startups in the form of venture capital.

• Apply for tenders

New companies can apply for government tenders. They are excluded from the “related knowledge/turnover” standards appropriate for typical organizations explaining government tenders.

• Reduction in cost

The government additionally gives arrangements of facilitators of licenses and brand names. They will give top-notch Intellectual Property Rights Services including quick assessment of licenses at lower expenses.

The government will bear all facilitator charges and the startup will bear just the legal expenses.

• Tax holidays for three years

New companies will be excluded from income tax for a very long time, they get a certificate from the Inter-Ministerial Board (IMB).

• R&D facilities

In the R&D area, seven new Research Parks will be set up to give offices to new businesses.

• Tax saving for investors

Individuals putting their capital additions in the endeavor subsidizes arrangement by the government will get an exemption from capital increases. Thus, this will assist new companies to convince more investors.

• Choose your investor

After this arrangement, the new companies will have an alternative to pick between the VCs, giving them the freedom to pick their investors.

• Easy exit

Now, talking about the easy exit then if there should be an occurrence of exit, a startup can close its business within 90 days from the date of use of winding up.

• No time-consuming compliances

For saving time and money numerous compliances have been facilitated for startups.

• Meet other entrepreneurs

The government has proposed to hold 2 startup fests yearly both broadly and universally to empower the different partners of a startup to meet.

Causes for failure

Lack of focus

When Bill Gates and Warren Buffet were asked about one factor that was responsible for their success, both replied with one word: focus. To understand how focus can help, let’s look at an example.

Grubhub is a food delivery startup. From the beginning, the company decided to focus only on food delivery. There are a lot of other services that a company like that could offer- pickup of food, catering, and more, but the founders chose to focus on just delivery. The result? They could execute technically and operationally and grow the business successfully.

Lack of funds

In 2018, bike rental startup, Tazzo, shut shop. The reason, as given by one of its funding partners, was a failed product-market fit that led to drying up of funding. Even though the startup had raised a considerable amount of funds, the lack of a profitable business model led to the startup shutting down.

Lack of Product Market Fit

There is no one “Fits in all” formula. It has deeper layers to it. This is more of a framework than a goal. Many-a-times, startups fail to validate their product ideas in the existing market scenario. In today’s competitive world, it is important to bring in a product or service that is both problem-solving and fulfils the customer’s expectations in every way, be it price-related or output-related. You don’t want to be wasting your time and efforts on creating something for which there is ‘no market need’!

Lack of innovation

According to a survey, 77% of venture capitalists think that Indian startups lack innovation or unique business models. A study conducted by IBM Institute for Business Value found that 91% of startups fail within the first five years and the most common reason is – lack of innovation.

Although India is said to have the third-largest startup ecosystem, it doesn’t have meta-level startups such as some of the big names like Google, Facebook, and Twitter. Indian startups are also known for replicating global startups, rather than creating their own startup models.

Among the most innovative Indian startups would be startups like ChaiPoint, Ola, Saathi, and Swiggy, according to a list of 50 most innovative companies in the world.

Fear of Startup Failure

While this fear lives in almost every entrepreneur, some tend to simply stop taking risks. Decision-making is hindered as the key goal becomes to not make even one wrong decision at any costs, thus limiting the startup’s gamut. Such fear can not only restrain but also motivate entrepreneurs when directed in a positive way. Having a negative approach from the start can influence thoughts and behaviour badly.

Poorly Harmonised Team

Any well-to-do startup requires a wide range of expertise in its team of employees and management. It is not hard to find technically proficient people these days. However, it is very difficult to find people who know how to get along with others and can be counted on when managers are not looking over their shoulders. Skills and work approach of the founder and his/her team should complement each other efficiently. Working for a startup can create a sort of pressure for the employees too, but as a founder you need to maintain quality communication with them and exchange thoughts eagerly.