Thursday, 15 January 2015

Companies Act, 2013: Practical compliance issue

While the Companies Act 2013 (the “Act”) is being appreciated for its laudable objectives, it also poses some practical issues for companies trying to achieve their compliances.

One of such issues is being faced by the companies under Section 11 of the Act which states that a company shall not commence business unless the subscribers have paid up the subscribed capital and a declaration has been filed to that effect by the company. Further, the section also states that if the declaration is not filed within 180 days from the date of incorporation, the Registrar of Companies (ROC) has the powers to initiate action for removal of the name of the company from the register of companies. Therefore, in order for the company to avoid removal of its name from the register, it has to ensure that the total capital subscribed by the subscribers to the memorandum of association is fully paid up within 180 days.

On the other hand, Section 56 (4) of the Act provides that every company shall deliver the certificates of all securities allotted, transferred or transmitted:
a. within a period of two months from the date of incorporation, in the case of subscribers to the memorandum;


A conjoint reading of the two sections stated above poses few legal and practical issues.

One such issue is that in case of subscribers to the memorandum of association, the shares to which each subscriber has agreed to subscribe are not allotted by the company since the capital has been subscribed to by them by virtue of incorporation of the company and the subscribers are already the members from the date of incorporation itself.  Therefore, Section 56(4) should, to that extent, not apply to subscribers to memorandum of association as it only talks of delivery of share certificates for securities ‘allotted, transferred or transmitted’. It appears that the intention of the legislature is to ensure that the share certificates are delivered to the concerned prospective shareholders of the company in cases where the shares are allotted, transferred or transmitted.

Assuming that Section 56(4) applies to the subscribers in the way it is presently written, it therefore means that the company has to at least complete the following activities within 2 months from the date of incorporation:

  1. procure PAN;
  2. Open bank account;
  3. Receive subscription amount for capital subscribed by the subscribers to memorandum;
  4. Hold the first board meeting to issue share certificates, adoption of common seal, adoption of format of share certificates, authority for signing etc;
  5. Procure common seal;
  6. Print share certificates;
  7. Get the share certificates stamped and signed;
  8. Issue share certificates to subscribers.

Procuring PAN, opening of a bank account, stamping of share certificates and holding a board meeting are all such processes which take a lot of time. It is only someone's guess that how all such activities can be completed within 2 months of incorporation. Also, if the subscribers or one of the subscriber to memorandum of association is a non-resident, the actions listed above take even more time. 

An appropriate provision would have been that in case of subscribers to memorandum of association, the share certificates be due to be delivered within two months from the date they have complied with the provisions of Section 11 viz. from the date when the subscribed capital has been paid up and not from the date of incorporation.

We hope that the MCA takes cognizance of this issue and take appropriate corrective actions.

Authored by:
Kajal Tandon
Akshat Pande

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