The Ministry of Corporate Affairs (MCA) had exempted private companies in India from the applicability of certain provisions under the Companies Act, 2013 (Companies Act) for operational flexibility and reduction of compliance requirements, vide a notification dated 5 June 2015 (2015 Notification).

The MCA has further relaxed the application of additional provisions of the Companies Act to private companies (including start-ups) vide its recent notification dated 13 June 2017 (2017 Notification). The relaxations brought out by the 2017 Notification can be availed only by such private companies (including start-ups), which have not defaulted in filing of their annual return and financial statements, as per the Companies Act.

In addition, the MCA has also notified the provisions relating to the ‘Fast Track Corporate Insolvency Process’ set out under the Insolvency and Bankruptcy Code, 2016 (Bankruptcy Code) vide its notification dated 14 June 2017.

This Ergo Newsflash discusses the key changes brought out by these MCA notifications:

Cash flow statement not mandatory

A start-up need not include cash flow statements in its financial statements going forward. Do note that for the purposes of the Companies Act and the 2017 Notification, the term ‘start-up’ includes only private companies which are recognized as startups by the Department of Industrial Promotion and Policy, Ministry of Commerce and Industry, Government of India vide their recent notification dated 23 May 2017 (refer to our earlier Ergo Newsflash dated 9 June 2017).

No quarterly board meetings

Start-ups are now exempt from holding quarterly board meetings every year. They are now permitted to hold 2 (two) board meetings in a calendar year i.e. once in 6 months, provided that the gap between two consecutive board meetings is at least 90 days.

Interested Directors counted for quorum

In case of all private companies (including start-ups), interested directors will be counted as quorum for board meetings, provided they disclose their interest to the board beforehand. Earlier, the interested directors were only permitted to attend the board meeting after disclosure of their interest, however, these directors were not counted for quorum.

Corporate Insolvency Process Notified

Sections 55 to 58 of the Bankruptcy Code dealing with fast track corporate insolvency process have been brought into force from 14 June 2017. Pursuant to this, corporate debtors namely, (i) a small company, (ii) a start-up, and (iii) an unlisted company with total assets not exceeding INR 10 million as per their financial statements of the immediately preceding financial year, will be eligible to apply for fast track corporate insolvency process. A fast track corporate insolvency process should be completed within 90 days of its commencement, as opposed to 180 days in all other cases.

Acceptance of deposits from members

The Companies Act restricts acceptance of deposits by companies (public or private) from public. However, a company may accept deposits from their members subject to certain prescribed conditions, such as (i) issuance of a circular to members with details of the deposit; including financial position, (ii) filing copy of such circular with the Registrar of Companies (RoC), (iii) there being no default in repayment of deposits and interest thereon, etc. The 2015 Notification had exempted private companies from complying with these conditions provided the amount accepted from members did not exceed 100% of its aggregate of paid-up capital and free reserves and the details were to be filed with the RoC.

The above exemption has been replaced and now extended to a private company which fulfills the following conditions:

  • the amount accepted from members does not exceed 100% of its aggregate of paid-up capital, free reserves and securities premium account; or
  • a start-up, for 5 years from the date of its incorporation; or
  • a private company which fulfills all of the following conditions:
  • not an associate or subsidiary of another company;
  • if its borrowings from banks, financial institutions or body corporate is less than twice of its paid-up capital or INR 500 million, whichever is lower; and
  • there is no subsisting default in repayment of such borrowings.
  • Such private companies accepting deposits from its members will file the details with the RoC in prescribed form.

Annual Return

In case of private companies which are small companies, the annual return will include only the aggregate of remuneration drawn by directors (as opposed to all other companies who have to include the aggregate of remuneration of directors as well as key managerial personnel in their annual returns).

Further, in case of start-ups, the annual return will be signed by the director of the company in the absence of a company secretary.

Auditor Report Inclusions

Auditors have a right to inspect the books and records of the company, and prepare their report with required inclusions as per the Companies Act. Such auditor’s report is placed before the members at the annual general meeting along with the financial statements of the company. Among other financial and accounting parameters to be considered, the auditor is required to report on the adequacy of the company’s internal financial controls system and if such systems are effective. The 2017 Notification has exempted this requirement for following class of private companies:

  • a one person company or a small company; or
  • a company which has (a) less than INR 500 million turnover as per its latest audited financial statement; or (b) aggregate borrowings of less than INR 250 million from any bank, financial institution or body corporate, at any point of time during the financial year.

Comment

Most of the above relaxations extended to start-ups by the MCA were earlier available to small companies, dormant companies or one-person companies owing to the small size of their operations and lean headcount. The changes introduced are a welcome step and shows the Government’s continued interest and commitment to encourage start-ups and entrepreneurship in the country. The amendments will reduce compliance burden, paperwork and improve efficiency of the management for start-ups, who usually have time and cost constraints in their early stages. Private companies in growth phase and particularly start-ups find it difficult to borrow from banks / financial institutions due to lack of collateral / security, and hence the amendment will help such companies raise funds from members in the form of deposits.

The notified fast track corporate insolvency provisions will also largely ease the liquidation process for start-ups and other small companies, which had been a major regulatory bottleneck for long. It’s now time to wait and watch if these measures will actually give much required impetus to start-up ecosystem, innovation and employment generation in the country.