Impact of Companies Act 2013 for startups

Companies Act 2013

  1. One-person company: New Companies Act has introduced a concept of one-person company.  A single promoter now need not worry having another partner to incorporate a company. As per the earlier Act, it was also required to have a minimum of two directors. In case of any dispute between the directors, it would create a dead lock. One-person company comes as a rescue in such a situation.
  2. Dormant company: Earlier it used be a pain running and maintaining a company than incorporating one. But after incorporation, liquidation was not easy. The 2013 Act states that a company can be classified as dormant when it is formed for a future project or to hold an asset or intellectual property and has no significant accounting transaction. Also any inactive company can also apply as dormant company. So any company which does not have any financial transaction can apply for dormant company status and need not go through the hassles of maintaining, complying with various legal requirements. Later, when they see some traction occurring they can renew the company into an active company by following the required formalities.
  3. Corporate Social Responsibility: As per the New Companies Act, any company having more than a net worth of Rs 500 crore, or a turnover of Rs 1000 crore, or a net profit of Rs 5 crore should spend 2% of the net profit as part of CSR. It is worth to note that this section is applicable for private companies also. Companies which don’t spend this money have to report separately with the reasons for not complying.

Contributing to Incubators, which has been notified by the Government of India, is eligible for spending under CSR program. This is a prosperous time for incubators due to this provision.

  1. Penal provisions for non-compliance: In the New Companies Act, penal provisions have been increased significantly. For regular non compliance like not filing return etc can lead to criminal prosecution. So startup companies should ensure they comply with regulations to avoid future problems.

Moreover, every director will be prohibited to become director for a period of five years in any other company if the default company fails to

  • File returns for consecutive three years
  • Fail to pay dividend

For example: Company A fails to file returns for three years. Its directors X, Y, and Z cannot be appointed as directors of any other company for the next five years. Moreover, they cannot even exit the company from the position of director till the returns are filed. This is very critical for fund managers, because if any of their portfolio companies don’t comply then their reputation will be at stake.

  1. Object of the company: As per the new legislature, a private limited company can have charitable purpose as a primary object, which was not allowed under the earlier legislature. This will be a great boon for social entrepreneurs who could not enjoy corporate benefits earlier. However, license can be revoked contravenes any of the requirements of the section but also where the affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public interest. The new Act thus provides for more stringent provisions for companies incorporated with charitable objects.
  1. A company can’t give loan to another company: As per the New Companies Act, any company is prohibited to lend to another company where the directors and shareholders are common. For example, Company A has good revenue and is making a profit. Founders of Company A start another company, Company B. Now Company B cannot borrow from Company A, as both companies have common shareholders. Penal provision of non-compliance is extremely high, so companies have a hard look at this.

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A Sankara SrinivasanAbout the author

A.Sankara Srinivasan is the founder & COO of RealtyCompass, a Smart Platform to Search New Homes, to help user discover all new real estate projects in his city”