This is the third piece in a series of articles about the legal issues that entrepreneurs have to bear in mind when they ‘start up’. You can read Part 1 of Starting Up: How to do ‘legally’ by clicking here and Part 2 can be accessed by clicking here.
Legal formalities for starting a company in India
Under the provisions of the [Indian] Companies Act, 1956 (“Companies Act”) a company can be set up in India either as a private company or as a public company.
The basic differences between a private company and a public company are as follows:
- A private company requires a minimum of two members while a public company requires a minimum of seven members;
- A private company has to have at least two directors while a public company has to have at least three directors;
- A private company is to have restrictions on the right to transfer its shares while the shares of a public limited company are freely transferable (subject to the provisions of the Companies Act);
- A private company prohibits any invitation to public to subscribe for any of its shares in debentures and also prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives;
- A private company may commence its business immediately on incorporation whereas a public company has to obtain a certificate of commencement of business prior to commencing business activities;
- Directors of a private company need not retire by rotation whereas in a public company 1/3 of its directors have to retire by rotation;
- A private company may grant loans to its directors without previous approval of the Central Government whereas previous approval is mandatory in case of a public company;
- It is not necessary to hold statutory meetings of the members in case of a private company whereas a public company has to hold statutory meeting within a period of six months and not less than one month from the date on which the company becomes entitled to commence business; and
- There is no restriction relating to managerial remuneration in case of a private company whereas in case of a public company the total managerial remuneration cannot exceed 11 percent of the net profits and incase of inadequacy of profits, an amount upto Rs. 50,000/- can be paid.
Registration of Memorandum and Articles
The Memorandum of the company, Articles of Association and the agreement, if any, which the company proposes to enter into with any individual for appointment as its managing or whole-time director or manager, are to be presented for registration to the Registrar of the State in which the registered office of the company is stated by the memorandum to be situated.
But what is the memorandum? The memorandum of the company is the company's charter. It states the company's name; the situation of its registered office; its share capital; the fact that liability is limited and, most importantly, the object for which the company has been formed.While selecting the name of the company for registration/ incorporation, at least one suitable name and up to a maximum of six names, indicative of the main objects of the company shall be filed for approval. However, it must be ensured that the name does not resemble the name of any other already registered company and also does not violate the provisions of emblems and names (Prevention of Improper Use Act, 1950) by availing the services of checking name availability on the portal.
After the name approval, the applicant can apply for registration of the new company by filing the required forms (that is Form 1, 18 and 32) within 60 days of name approval.
Every director of a company is required to obtain a unique identification number called Director Identification Number (DIN) and a Digital Signature Certificate (DSC) from the Ministry of Corporate Affairs.
A declaration that all the requirements of the Companies Act and the rules there under have been complied with in respect of the registration is to be filed with the Registrar. The same can be made by an advocate of the Supreme Court or of a High Court, an attorney or a pleader entitled to appear before a High Court, or a secretary, or a chartered accountant, in whole-time practice in India, who is engaged in the formation of a company, or by a person named in the articles as a director, manager or secretary of the company. The Registrar may accept such a declaration as sufficient evidence of such compliance.
Registration and its effects
When the requisite documents are presented for registration, the Registrar has to see whether they answer the requirements of the Companies Act. If the Registrar is satisfied that all the requirements have been complied with by the company and that it is authorized to be registered under the Companies Act, he shall retain and register the memorandum, the articles, if any, and the agreement if any. He thus registers and places the name of the company in the Registrar of Companies.
On such registration of the memorandum of a company, the Registrar certifies under his hand that the company is incorporated and, in the case of a limited company, that the company is limited.
This is the third piece in a series of guest articles being authored by Ritambhara Agrawal, Managing Partner, Intelligere. You can get in touch with her by writing to ritambhara[at]intelligere[dot]in. Also, do share with us your thoughts and views on this story by writing to us at firstname.lastname@example.org.